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 to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for being with us.
Scott: Yep, both myself, my co-host, both financial advisors, and spent our careers, and do continue to do so meeting with people, helping them with their finances, and been broadcasting this program for 28 years, helping our listeners, historically, Trust Show Radio, but now mostly via podcast. Although, we still have one, Trust Show Radio that runs us. But glad you're with us. And if you would like to be part of the program, you've got a question for us, we would love to take your question and you could send us an email at firstname.lastname@example.org. And we'll get you on the program.
Scott: We've got lots of good things to talk about.
Pat: Well, you know, we have on the second half of the show is Hal Hershfield.
Scott: Yeah, we've had him on a couple of times before on The Future Self and he has a new book out on your future self.
Pat: "Your Future Self"...
Scott: We're looking forward to...
Pat: ...I enjoyed.
Scott: ...hearing from Hal.
Scott: And I wanna talk a little bit about some of these empty buildings, commercial real estate...
Pat: There's quite a few of them.
Scott: ...and how some of the government policies might be making things worse. But let's start off right with calls now, if you don't mind, Pat. Do you?
Pat: I don't, but I...Yeah, the empty building thing. It's, and you keep your...
Scott: I had lunch with someone a week ago. They're a financial advisor. Their business is in Downtown San Francisco. They're moving to the top floor, one of the top floors of the building they're currently in, taking over more space, paying less, and it's fully furnished. It was some tech startup, had it completely designed right before the lockdowns. And so, they never actually occupied it.
Pat: Brand new.
Scott: Paid $1 for the furnishings, $1 for the furnishings. And then, the lease for the higher floor, more space is less than they've been paying currently.
Pat: And they haven't given up on San Francisco.
Scott: No. They have not given up on San Francisco.
Pat: They have not given up on San Francisco.
Scott: Well, essentially not quite as bad as some of the news reports, but last time I was there. But you think about this, if you're an owner of that building or the lender, the lender, the lender. And what happens with a lot of these...It's not like a traditional mortgage. When you get a mortgage on your house, they look to see if you can qualify, right? You qualify for getting for it. "Okay, Mr. and Mrs. Jones, here's your mortgage, it's a $400,000 mortgage, 30-year mortgage."
If your home falls in value, as long as you keep making the payments, the mortgage company doesn't care. They never come and say, "Hey, your home's only worth $375,000. We need you to throw in more cash." They don't bother doing that. They want to make sure you keep your insurance on it, make sure your property taxes are paid. Other than that, they don't really care. Most commercial mortgages work quite differently.
Pat: They want...
Scott: Same thing with business loans.
Pat: They want to know what is your revenue, what are your expenses. Your covenants say, "If you fall below this and then, we have the ability to take back the building or to call the loan." What really happens though is that would apply if it was just a poorly run building. Like, it's just poorly run in a field of well-run buildings where all of a sudden, your revenues are down by 50%. You're not meeting your covenants. They would call that loan. The lenders would call that loan. In this type of an environment, the lenders don't necessarily want to call the loans. They want to work the loans out.
Scott: Well, they don't really want the buildings back.
Pat: They don't want the buildings back.
Scott: But in the situation I just talked about...so the value of that business is in decline, right?
Pat: The value of that particular building that you talked about, where they moved to the top floor.
Scott: Building, yes. Definitely.
Pat: Yes. It's probably lost 50% of its value.
Scott: Because just like other investments, it's based upon cash flow, both current and projected future cash flows.
Pat: And at that point in time...
Scott: So, if a building's half empty and the tenants are the ones that are still there paying less rent than they used to, the building could be significantly reduced in value.
Pat: And at that point in time, the owner of the building may not have any equity in the building at all. He or she or the corporation may have negative equity...
Scott: Or the pension.
Pat: ...or the pension company may have negative equity in the building. In which case, sometimes they just say, "You know, you're Mr. Lender. Have at it."
Scott: We've already seen it this year. We're going to see, I think, more and more of this coming.
Scott: Some of these major cities, the downtowns of these big cities, it's so fascinating how things can change because four years ago, it was all the...I mean, the downtowns with the whole revitalization and downtown was the place to be. And then...
Pat: It was. It was.
Scott: It was. Now, it's changed.
Pat: ...like, that fast.
Scott: I mean New York's back, apparently. New York's back.
Pat: Last time I was in New York City, I was there for business, it was crazy busy on the streets.
Scott: To make matters worse, a lot of these cities are now starting to hit owners of buildings with a tax to offset their carbon usage. Okay? This is from carbon dioxide. So, New York City, already has some of the most expensive buildings in the world, beginning next year, a building owner is going to face a $268 fine for every ton of carbon dioxide emitted beyond certain limits. So, you're already losing money on the building. You can't afford to do any upgrades to it. The tax bill...So, here, the "Wall Street Journal" tallied a bunch of buildings in New York.
Next year the tax bill...There's 128 properties. Could be 50 million bucks during the first five-year enforcement. But that was dollars...That $50 million is going to go to $214 million by 2030.
Pat: And so, in order to lower their emissions, they actually have to invest in the cleaner technology in their own buildings, where sometimes they can't even hang on to their own building.
Scott: The real estate board of New York and an engineering consulting firm said that more than 13,000 properties could face fines totaling $900 million annually. Some of the stuff, you can't make this stuff up.
Pat: It's just like...That's the sort of thing you do when actually the buildings are all full. That's the way you step back and you're like, "I don't know if I should put any more pressure on these businesses right now. We should be happy with what we got."
Scott: Again, it's one of these times and you could be an investor in one of these buildings right now. Maybe you own a commercial property. Maybe you're an investor in some sort of pool, a REIT that specializes in property...office complexes. If so, you've taken a beating, right? These things are always a good reminder. Like, you really never know what's coming tomorrow. And the older you are, the more important it is to have diversification. Because if something...You could have amassed $10 million in your life savings, had a commercial property. You said, "I'm gonna buy this $30-million property."
Pat: "I'm gonna put some leverage on it."
Scott: "I'm gonna put $10 million down. I'm gonna borrow $20 million." Suddenly, the building's worth $16 million and you're insolvent.
Pat: Yes. It happens.
Scott: Yeah. It's happened a lot recently. Anyway, that's where we started the program at today. [crosstalk 00:08:41]
Pat: All right, let's go to the calls.
Scott: Let's not talk about that for a while. Let's do the calls. That's kind of depressing. Let's start off here with Denise in the Bay Area. Denise, you're with Allworth's "Money Matters."
Scott: Hi, Denise.
Denise: Thanks, Scott. Thanks for taking my call.
Scott: Thank you.
Denise: I listen to you guys all the time. First time caller. I guess I have a pretty simple question. We live here in Silicon Valley in California. We've been here, oh, both my husband and my lives. And [crosstalk 00:09:09]
Scott: Have you been in Silicon Valley your entire life?
Denise: Yeah, I was born in Palo Alto Hospital...
Scott: Oh, wow.
Denise: It was in Stanford. It was called Palo Alto Stanford Hospital back then, and I worked there for 37 years. So...
Denise: Yeah, it's been my whole life. Yeah.
Scott: That's when there were orchards around.
Pat: Yeah, you grew up.
Denise: Yeah, right now. Yeah. We now own two acres of apricot orchards actually here in the Silicon Valley. And we're looking to retire. Our kids are [crosstalk 00:09:35].
Scott: You know, real quick. I know this is aside totally...This is not why you're calling. The two acres of apricots, is it designated for agricultural, or could it be developed at some point in time in the future?
Denise: It could be developed.
Scott: Okay, interesting.
Denise: Yeah. It's not anymore. It was...It's been in the family since the, oh, 1940s. So, yeah.
Scott: Wow, okay.
Denise: It's down to about that. It says we're down to just under two acres now. [crosstalk 00:09:58]
Pat: I had some really expensive apricots. Yeah, yeah.
Denise: Yeah, yeah, yeah. [crosstalk 00:10:04]
Scott: "I'd like a bag of apricots." "That'd be $822."
Denise: Well, we dried our last apricots for this year forever on this piece of land, which is pretty sad.
Scott: Oh, yeah.
Pat: Are you selling it?
Denise: Yeah. Well, we're thinking of putting it on the market...
Pat: Okay. All right.
Denise: ...because as usual, we are house-rich, cash-poor, and our kids don't want to be in California. They're not here. They're up in Oregon. And so are the grandkids. And we're looking at getting out of here.
Pat: And is your home located on that property?
Scott: We had a couple of calls like this last week.
Pat: So, what's your question for us? What do you...?
Denise: Well, okay. If we sell it, and how much are we looking to possibly being able to...because we hopefully will be able to buy it for cash. And how much do we need to have in the bank to really retire? To really be retired permanently.
Pat: Well, let's walk through your situation. How old are you?
Denise: I just turned 65. My husband's 67.
Pat: Okay. And are you both retired or are you still working?
Denise: Nope. We're both retired.
Denise: Both retired.
Pat: And how much money do you have in savings accounts, brokerage accounts?
Denise: We have, probably, about...oh, in my 401(k) about $200,000 and a Roth about $70,000 and cash about $50,000.
Pat: And are you both taking Social Security right now?
Denise: Yes, we are.
Pat: And how much are you receiving, both you and your spouse?
Denise: Between the two of us, about $4,000.
Pat: And do either one of you have a pension?
Denise: I will receive one from Stanford starting, I believe, it's next year in January. They're trying to phase us out. So, I don't know what it's gonna be.
Pat: You're not expecting much then?
Denise: No, I'm expecting probably about $60,000, but I'll have to roll that over into either a Roth or 401(k).
Pat: Oh, $60,000 lump sum, not $60,000 a year.
Denise: No, a lump sum, because they want us gone.
Pat: Okay, and would you receive any monthly pension when you retire?
Denise: No, that'll be it.
Pat: Okay. All right. Okay.
Scott: So, you have $260,000 in four accounts.
Pat: And is your two acres of apricots, is that separate from your primary residence or all is one and the same?
Scott: It's all in the same.
Denise: No, it's all in the same. Oh, I forgot to tell you, we own a house up in Lake Tahoe, which is paid for, completely paid for.
Scott: And what's that worth?
Denise: About $1.5 million.
Scott: Up there, and what's your property in the Bay Area worth?
Denise: Well, about $5.5 million.
Scott: And what did you pay for the house in Tahoe?
Denise: Oh, we didn't. My husband and I were young and stupid and bought a piece of land and just started building on it before we even married and had kids and did a little at a time. It took us over five years. We're probably still doing it.
Scott: So, your basis in there is almost nothing, but you paid for it.
Scott: I'm glad you were young and stupid. That was a good idea to be young and stupid.
Denise: We were young and stupid. And our kids are very happy that we were young and stupid.
Pat: As they should be.
Scott: So, let's assume you sell the house and property for $5.5 million. You've got $500,000 exemption from capital gains. My guess is that your cost basis is next to nothing in this property.
Denise: Yeah. Yeah. My father-in-law owned it years ago when he passed away, oh, I don't know, 15 years ago, and it was a step-up in the basis of...
Pat: Oh. Okay. All right.
Scott: What was it worth then?
Pat: What was it worth then, yes?
Denise: What was it worth then?
Denise: Oh, it was...I don't know.
Pat: 15 years ago, $2 million?
Scott: Let's say it's $2 million.
Denise: Oh, you know, you know why, you guys? Because we got the property, but we had to finagle things to do it. It was during the 2008 downturn. And so, everything took the...I don't know how I want to say it, really bad. And so, what we did was we had three acres. So, my husband subdivided it. But we had to put everything we had...that's why we don't have a lot of cash anymore...everything we had into it to subdivide it and sell that piece of property to be able to save the two acres in the stock land.
Scott: Got it. Okay, so you'll have some capital gains. During this call, it's kind of hard to determine how much that is. But...
Pat: Oh, are you going to sell the house in Tahoe as well?
Denise: No, the kids would kill us.
Scott: Yeah. I mean, so let's assume you net...Let's say kind of worst-case scenario. You end up $3 million net.
Pat: Yeah, I was thinking...
Scott: ...which it's gonna be a little more than that. And you were conservative and said let's do a 4% withdrawal, assumption. That's $120,000 a year of income that should provide.
Pat: So, what would a house up in Oregon cost you?
Denise: Well, that's what we're looking at right now. We're gonna go up there next month, take a look at that.
Scott: Not $5.5 million.
Pat: No. So, here's what I look at it there. So, let's just say you net...It's going to be a little bit more than three million. But let's just say...
Scott: Let's just say $3.5 million.
Pat: ...$3.5 million. If you spend one million dollars on a home in Oregon, right, it leaves you $2.5 million investable, right. If I was to take a 4% distribution, that's $100,000 a year. You've got $48,000 coming out in Social Security. So, that's $148,000 a year. If I add up your Roth, your cash, and your IRAs, right, it's $330,380. Yeah, you'd spend a million dollars up there and live on $150 grand a year.
Scott: What's a house gonna cost you?
Denise: Well, you could buy one for, you know, $600,000 and $700,000.
Scott: No, okay. What are you planning on?
Denise: Yeah, we're thinking of $1.5 million. We just don't know if that's too much or not enough. We want it to be big enough that our kids can all come to one house when they come.
Scott: You know what's funny? So, I'm gonna tell you this. So, I was just visiting a friend of mine. He's got a place in Truckee, California, which is outside of north of Tahoe. He just built a new house. He had a house there before and a nice community. He built a smaller house. He's 70 years old. He's got several grandkids and he said, "Scott, I realized...We realized, for us, it was better not to have everyone here at once. Just the chaos, the family drama. He says...Now, he says, "Well, we're gonna just have it...have different families at different times."
Pat: One at a time.
Scott: ...which I thought was...And I'm just throwing that out there before you...
Pat: $1.5 million would be kind of pushing it for you.
Pat: $1.5 million would be kind of pushing it for you.
Scott: Well, it depends what your lifestyle is like. You travel? How much do you...? I mean, how you guys making it work now at $50,000 a year?
Denise: Well, we have rented this house in Los Tahoe before off and on. And we can't do a 1031 exchange because I don't want to spend that amount of money on a new house.
Scott: Yeah, no, no, no.
Denise: Yeah. And we go to Tahoe. We rent this house and we go to Tahoe.
Scott: Got it.
Denise: Our house is in Rubicon Bay. I don't know if you know where that is.
Denise: It's, you know, hey, we love it.
Pat: Yeah, what's not to love? I don't think I'd go more than...I don't think I'd spend more than $1.25 million.
Denise: Okay. All right, out the rest in the bank.
Pat: And that's assuming that house in the Bay area...
Scott: I figured out what your capital...It depends. We don't know what you're gonna net because we don't know if the step-up basis, if you've got a cost basis of this for tax purposes of $2 million or $20,000.
Denise: Yeah, well we had...
Scott: We don't know how the estate... I don't know if it was in a trust ahead of time, then there wasn't a step-up basis, depending how it was inherited as well.
Pat: I'm assuming that the basis is pretty close to zero. I mean, that's what...
Scott: But maybe not.
Pat: It might not be...
Scott: That's what...based on these assumptions.
Pat: ...based on these assumptions.
Scott: This should put you in a good place.
Pat: But the $1.5 million could possibly work. It just...Before you go buy a house, sell the house.
Scott: Oh, yeah. Sell the house. And you guys certainly couldn't...Yeah.
Denise: Oh, yeah. No, I know that. I know. And then, I thought, well, maybe we should do a bridge loan, you know. [crosstalk 00:18:51]
Scott: You're not going to... [crosstalk 00:18:52].
Pat: No, no. You live in Tahoe until you find your place up in Oregon.
Pat: Yeah, yeah. You don't take any loans out. You're going to pay cash for this new house.
Denise: Yeah. Yeah. Totally.
Pat: You're not taking any loans out. But you need to sit down with a qualified...
Scott: I'd do a good financial plan and look at what...You need to figure out what your cost basis is.
Pat: That's number one.
Scott: What you're actually going to net from this.
Pat: And then, a good financial plan around that.
Scott: And then, I wouldn't buy anything until I...A bird in the hand is worth two in the bush. You never know what tomorrow brings. I would want this thing escrow closed before I bought another house.
Pat: Oh, absolutely.
Scott: You already have a residence you can live in in the interim. So, glad you called, Denise.
Pat: I appreciate your call.
Scott: It should be a nice next chapter for you, the two of you and your family. Let's head to Virginia. Talk to Jeff. Jeff, you're with Allworth's "Money Matters."
Jeff: Hey, good afternoon, Scott and Pat. Thank you for taking my call.
Jeff: I listen to your show every week, and I always learn something new.
Scott: Oh, good.
Jeff: So, I really appreciate it.
Scott: Thank you.
Jeff: I've got a question about some...from my mom. She's going to be selling her house in the next couple of months and moving into an apartment. And I'm trying to figure out what's the best thing to do with that cash to structure it to make it last as long as possible to pay that monthly rent expense.
Scott: How old is she?
Jeff: She's 81 and she's in excellent health. So, could go, you know, into her 90s, most likely.
Scott: And what's the house selling for?
Jeff: We think between $350,000 and $400,000, somewhere in there. And I've got her...
Scott: And why is she selling it and moving it to an apartment?
Jeff: Just some, like, maintenance things and she's had two burst pipes in the past winters and keeping up the yard and things like that. So, it's not an assisted living place. It's just like a 55 and over community where there'll be games and TV rooms and social activities and things like that.
Scott: Okay. Is she excited about it?
Jeff: She is now, yeah. Originally, she wasn't. But it's a very nice place and so, she's, you know, cleaning out her house and getting ready for the move now.
Scott: And how much is her rent?
Jeff: It's going to be...I figure with utilities and whatnot, it'll be about $2,800 a month, something like that.
Scott: And what other income does she have coming in?
Jeff: She has about 48...I'm sorry. About $4,000 a month in income from VA survivor benefits, pension, and Social Security, and that's what she lives on. She doesn't spend any more than that, most generally. So, usually when we have an RMD, it just goes straight from the IRA over to the brokerage and, you know. [crosstalk 00:21:35]
Scott: How much does she have in retirement accounts and brokerage?
Jeff: Okay. She's got her traditional IRA at $233k and her brokerage is $523k. So, the total is $756k of all her adjustable...
Scott: And how are those dollars allocated? How are they invested?
Jeff: It's 60/40 stocks/bonds. It's at Vanguard and we've got the [crosstalk 00:22:00]
Scott: And how long has it been this way?
Jeff: ...advisor. I'm sorry?
Scott: How long has it been a Vanguard?
Jeff: Not long. We consolidated after my father passed. We were working on that, getting it out of different places and into Vanguard. So, probably, three or four years now.
Scott: And how much does your mother watch the values of these accounts?
Jeff: Oh, not at all. Me and my brothers watch them.
Scott: Okay. And the reason I ask that is because, look, what I've seen, not in my personal family, but was certainly seen with clients or not, like, this sort of situation, child comes in. "Mom, let me help you invest these dollars," they put mom's $500,000 in a nice balanced diversified portfolio. It falls to $460,000. Mom freaks out. Mom is panicking, right? And then the next thing you know, they gotta unwind it just because mom doesn't understand it because she's been 80 and had these personal experiences. But if she's not paying any attention to it...
Jeff: No, we certainly update her. You know, I do these little financial reports every couple of months for my mother and father.
Scott: Yeah, but obviously it sounds like you understand the markets really well.
Jeff: Well, and the Vanguard people, we've got whatever the lower tier advisor is, where they go in and rebalance quarterly or something.
Scott: Yeah, but they're not gonna protect the account from going through market cycles.
Jeff: Oh, no, no, no. No, of course.
Pat: What do you think you should do?
Scott: Yeah. I like that.
Jeff: And then in local banks, she's got $61,000 in cash earning nothing. And we weren't doing anything with that because we were waiting for...see what moving expenses would be and things like that. And then, before I talk about what I would...One thing I was just thinking about as I was waiting is, you know, do we set up some kind of carve-out for potential long-term care? But what I was thinking is, like, you know, some amount in like a high-yield savings, like at Vanguard.
Pat: You already have 40% of the portfolio in fixed income.
Jeff: Yes. So...
Pat: Okay. So, when you say some amount in high-yield savings, what does that mean?
Jeff: Maybe, like, two years' worth or three years' worth of rent, something like that. And then...
Pat: And what would you do with the rest?
Jeff: I struggle with that a little bit. I don't know if...I mean, like, time horizon, should it go into, you know, just regular index funds at Vanguard?
Pat: Yep, yep.
Jeff: I don't know if the time horizon is long enough to do that?
Pat: You just described pretty much a 60/40 portfolio. She's not going to spend all these dollars in her lifetime. You're going to invest these as if they're your and your brother's and your siblings' money.
Jeff: Yeah. That's kind of how...She's got enough current income for her needs. So, yes, we are sort of...Yes, we are investing for the next generation.
Scott: Keep it in mom's name. Mom needs it. Obviously, it's there for mom, right? It's mom's dollars, but...
Jeff: Oh, for sure.
Pat: I would do 60/40.
Scott: I'd do the same.
Pat: I'd just lay it on top of the rest of the portfolio.
Scott: Yep. Totally agree with Pat.
Scott: You don't have to over-complicate it.
Jeff: I'm sorry, so, like, put it in the way that it is, let's say, in the brokerage...
Scott: Well, you know, I don't know how it's managed from a tax-efficient standpoint. So, I'd want to make sure it's managed somewhat tax-efficiently, but...
Jeff: Yeah, they've got primarily the bonds inside the IRA and, primarily, stocks in the brokerage.
Pat: There you go. Yep.
Pat: Correct. Correct. And just more of the same.
Jeff: Okay. Okay.
Pat: It's more of the same. Just keep it 60/40 and decide how you're going to allocate it to the IRA through the brokerage, but the reality is you're managing it, not...
Scott: You're thinking about it the right way.
Scott: [crosstalk 00:25:38].
Pat: Your mom is living comfortably on the $4,000 a month that she has. If she needs to get it, this money, she could get it, the money. No one knows, right?
Jeff: Oh, absolutely.
Pat: No one knows. So, I think that the idea is just push it more the way it is.
Pat: And, you know, that's the way to go.
Scott: Totally agree. Appreciate the call, Jeff.
Announcer: Can't get enough of Allworth's "Money Matters?" Visit allworthfinancial.com/radio to listen to the "Money Matters" podcast.
Scott: Welcome back to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McClain.
Scott: It was interesting, that last call. If most people said an 81-year-old sells their house to move into an apartment, how should those dollars be allocated? And someone says, "60% should go into stocks." Like, most would say that seems ridiculous, someone that old, right? But investments are really based upon a couple things. One is time horizon. How long we have before we need the money? And some could say, "Well, at 81, the time horizons can't be that long because we're getting...The older we get, the closer we are to death," right?
And then, the second is risk tolerance, how much ups and downs someone can stomach. And there's some people that they're like, "I just can't handle it. I wanna be in something super secure. I know it's gonna cost me...I'm not gonna have as good as retirement, but I can't stomach the ups and downs," right? You've met those people.
Scott: And, like, the previous caller we had, here's a situation where we've got a mom who's trust her finances to her son. Her son obviously really understands these things, done a fine job. So, we've got risk tolerances in that situation.
Pat: And mom doesn't really pay much attention.
Scott: So, it's high, one would assume. And time horizon is extremely long because it'll never be spent.
Pat: Yeah, it's based on the children, not on the 81-year-old mom.
Scott: Yep, and that's...
Pat: Now, if that situation changes, then the portfolio would change.
Scott: That's right.
Pat: But that's why the rule of thumb, when I started in this business 35 years ago, when you take their age minus, what was it, 40 years?
Scott: 100 minus their age.
Pat: Yes, it was 100 minus their age.
Scott: Whatever that means.
Pat: That would be me now, which would mean my equity...
Scott: You're 60 today?
Scott: You don't look a day beyond 59, by the way, Pat.
Pat: Actually. Thank you. Thank you.
Scott: That was a compliment.
Pat: They say at the gym, they say "You look good for a 75-year-old." That's what they always tell me.
Scott: Wow, you walked out...You don't even use a handicap spot, Mr. McClain.
Pat: Like, that's kind of work that I put in. But with that 100 minus your age, which was the old rule of thumb, my portfolio should be 40% equities, which is just ludicrous. That makes no sense.
Scott: So much for rules of thumb. Anyway, we've got a great guest joining us now, Hal Hershfield. And Hal's been a guest on our program in the past. We've always enjoyed talking with Hal. Hal is Professor of Marketing, Behavioral Decision Making, and Psychology at UCLA's Anderson School of Management. And he really looks at the intersection between psychology and economics and looks at ways we can improve our long-term decisions. And from a financial planner standpoint, like we are, that is like bedrock, foundational, to good financial planners, people, how do we really look at our long-term things? And so, you might have read him before because he's...I saw him somewhere.
I saw he's on a...I listened to a podcast recently, I forget it was. Anyway, Hal, thanks for being part of the program.
Hal: Hey guys, it's great to be here. Always fun to talk with you.
Pat: Yeah, and your book, "Your Future Self", enjoyed it.
Pat: So, before we start asking a ton of questions, because I do have a ton of questions for you. I do, especially about one of your experiments that you conducted. Will you just kind of bring our listeners up to speed on what "The Future Self", why it's important, and really what it really means, and why we should think about this, and how it affects the way we plan our lives and live our lives?
Hal: Yeah, absolutely. So, I mean, you know, the future self is this future version of you. I mean, it could be you at, what do we say, you're 59 now, at 64 in five years, right? I'm just saying, maybe, you said you looked that way. But, you know, your future self is who you'll be at some specified point in time. And it's important because when we think about decisions that have consequences now and consequences later, when we say that, it's kind of abstract. But if we can get concrete, what it really means is that the consequences later happen to some future version of you.
And so much of my research [inaudible 00:30:50] but it's some other person. That's how we think of our future selves. And if we can start to try to understand who that person is and really, like, improve the relationship between who we are now and who we will eventually be, that's when we can start to see changes in the decisions that we make. And, you know, you can get really concrete and think about finances, but, also, it applies to a lot of other spaces as well.
I hope that...That's just a nutshell version of an answer there. I hope that helps out.
Pat: It does. You know, you think about it, it applies to health and exercise and diet and finances, right? And even...
Scott: ...relationships, I would imagine.
Pat: Yes, relationships.
Hal: Yep. Yep.
Pat: So, talk a little bit about this experiment you did with many people with the aging mirror and how it worked.
Scott: I've got one at home, by the way. It's my current self. It's just a regular mirror. Like, when did my skins go move with the razor? Used to, the razor would...
Hal: Yes, it's very cheap. You can buy it in Home Depot and pop it right into your bathroom. An aging mirror.
Pat: I ran into someone from high school last weekend.
Scott: And they lied and said how good you looked. "Man, you look fantastic, man. You look just as good as you looked in high school." And you lied back. "You look great too."
Pat: One of us was telling the truth.
Hal: Ah, I love it.
Pat: I hadn't seen her in 42 years since high school.
Hal: Wow, wow.
Pat: And what's interesting is we recognized each other, which was actually kind of bizarre. And then, you realize when you just start talking, you're like, you don't really change that much.
Pat: But then I have run into people from high school and you're like...
Pat: "Whoa." Okay. Give back the mirror.
Scott: Get back the mirror. Pat and I, we can have our discussion off way.
Hal: Oh man, I love that. Well, yeah, I mean, basically in my research, we were trying to somewhat create that experience for your own self. And the thinking was, if I wanna get you to connect to your future self, one way to do it is to make that future self more vivid, you know, and more concrete. We know from a lot of other places that if I can make an example of something vivid, that'll make it emotional. And if it's emotional, that's the type of thing that'll finally get you to change your behavior and take some action. Right?
So, we started really simple. We said, "Well, let's just see if we can make people look older." I mean, I started doing this. Guys, it was a while back. And there wasn't the technology that we have now. So, I was working with graphic artists. And, you know, basically, they know how to do it. You mimic the aging experience. You add some fat underneath the eyes and your ears droop, and you get some age spots and your hair, you know, stems out and all those fun things. You know what I'm talking about.
Scott: Oh yeah.
Hal: And so, you know, early on what we had done is we had put people into virtual reality environments where we would, you know, have them stare in a mirror and they would come face to face with their future selves or just a, you know, regular sort of digitized image of their current selves. And now, when we started doing that, this is kind of small samples with college students and stuff I found out, yeah, sure enough, that, you know, makes people a little bit more likely to want to save for the future.
And we've essentially expanded it and recently finished a study where we exposed real consumers to their age-progressed images and found that they're a little bit more likely to make an actual contribution to their retirement account. But, you know, the basic idea is, make that future self more vivid. Don't, you know, just talk in terms of compound interest and growth charts and portfolio allocations but talk about who the person you're going to be really is and, you know, what that person will look like and feel like and what their interests will be and how they'll spend their time. Those are the sorts of things that I'm interested in.
Pat: And there was a quote in your book that talked about people that give to charities are more likely to give more money to charities the more vivid those people appear that the money's going to.
Hal: That's right. That's right.
Scott: You know, the same thing with location bias or whatever.
Scott: Earthquake in Ilver in Morocco, "Wow, it kind of sucks for them." Earthquake happens in your own community, you're out there helping, right, checking everything.
Pat: ...which is what I actually, you know...
Scott: I should have said stinks for them.
Pat: But the idea that you actually got the technology so that if I moved my head, the head would move with it and it reminded me that old Lincoln Financial commercial, life insurance commercial where they were...
Hal: Yeah. Yeah. Lincoln Financial, yeah.
Pat: Yeah, Lincoln Financial when they were...
Scott: Oh, yeah.
Pat: The pilot...They were on a plane, and they were sitting next to their young self, right?
Hal: Yeah, yeah. That was a great ad. The guy would come back and from first class and the passenger in economy says, "Are you future me?" And the guy says, "Yeah, you've been saving so I can sit up here" and then, you know, SNL did a version of that.
Pat: Oh, yeah.
Hal: ...when the guy comes back, and he's been drinking. He says, "I'm future you and I spent all your money on drugs and alcohol. And I'm having a great time."
Pat: I remember that. I remember...I'm glad you brought that up. I was going to bring the SNL skit up, but that was... And so, the idea behind this... So, you think about it, right? It's like, well, how do you...and this is just money, but I was thinking about it for, you know, I'm getting close to retirement and the big thing that worries me in retirement is the future me, not that I don't have a job. That doesn't worry me at all, right? Which probably should, but it doesn't. And it's not really the finances because I plan well.
It's just...I worry about what the future me is going to look like in 10 years when I'm 70 or 75 years of age if I'm not engaged, right?
Hal: Yeah, exactly.
Pat: What could you do to help me?
Hal: That's a good turn. You know, I mean, I love that question, right? Because it's not about, you know, you saving up or what's your right, you know, relation strategy or whatever it may be. But rather, now you're talking about something almost even more fundamental, which is how are you going to spend your time. [inaudible 00:37:29]. Part of the trick here or the tricky part of this is that, you know, we don't know how we'll change once we...Starting to sound a little bit like Yoda here, but we don't know how much we'll change once we go through a change. Right? So, in other words...
Scott: That's right.
Hal: ...you'll retire. That's a big change. We can only anticipate what that'll be like, but then, once we go through it, things may be different in ways we can't really anticipate. But I think one of the keys there is sort of flexibility and openness and also, you know, attention being paid to values and what's important now. You know, because you said that thing earlier, you ran into your high school classmate, and you realized in some ways, we haven't changed all that much.
What's interesting about change over time and personality is that there can be some surface-level things that really do change, and then on some deeper level, you can say, "Well, you know, some of these things that define me, that may not change as much but the sort of execution of those interests may change over time." You know you may be adventurous and that looks very different being adventurous when you're 45 versus 75. But at the core may be the same and so yeah, I would kind of pay attention to the value.
Scott: And that's kind of where you talked about where when people viewed people aging that it's the loss, the people that had the loss of the prefrontal cortex were the ones that actually changed...were viewed by others as those people that changed the most, correct?
Hal: Yeah, that's right. Exactly. Yeah, so you know, it's, like, this is work from great researcher Nina Strohminger. She talks about, you know, how you look at caretakers of people with sort of neurodegenerative disorders and you say well, "Which ones really impact someone's sense of self?". And it's not necessarily Alzheimer's or Lou Gehrig's. Lou Gehrig's the body deteriorates with the mind the same. Alzheimer's, you kind of lose your memories, but some ways, you can sort of see the person there, but it's a front-end temporal dementia, where sometimes you see somebody who once was really shy. Now they're talkative, or they used to be talkative and now they're shy. Something like this.
That's when the caretakers say, "It's like no longer the person I miss." And so, you apply that to ourselves and it's the core traits that really matter there.
Pat: And so, with the few minutes we have left, I do wanna ask two questions. One is you talk about the mistakes we make, miss our flights, poor trip planning, and pack the wrong clothes, which is a, you know, you talk about it in the second section of the book, which was really easy to understand what that meant, like, miss our flights, poor trip planning, and packed the wrong clothes. And then to follow that up, can you talk a little bit about metacognition?
And I didn't see that anywhere in your book, but if you're doing any research on metacognition and how this is affecting kind of the future self.
Hal: Oh, it's a great question. And so, just to make sure I'm clear, I know you said just a few minutes, and it's always great to talk about metacognition in a few minutes, right? But I...
Pat: Well, no, listen, listen, Hal, it's a podcast. So, talk as long as you want. I'm interested in the... I didn't see it in your book and maybe it was there, but I didn't see metacognition and I thought, "Well, isn't this kind of metacognition a little bit?"
Hal: Yeah, no, it's right. And when researchers say that, what they mean is our ability to sort of understand our own thoughts, right, and understand our own sort of thinking processes and whatnot. And you're absolutely right. That is something that's at the core of it because we're not going around...Most people aren't going around saying, "Well, let me think about my future self now and I'm going to do this thing for my current self and this thing for my future self."
It is really asking people to kind of step out outside of their daily existence and do some sort of examination of the way that they think about current and future selves. And to some extent, that's a big point of the book, which is to get my research, which is to get people to be a little bit more, you know, if I can say it, like, intentional about the way that they are thinking about these different selves and kind of balancing out their interest now and their interest later.
Pat: ...Which is, you know...So, this is primarily a financial show and people are listening like, "What has this got to do with finance?" Right?
Hal: It does, part.
Pat: Part of it...
Scott: It kinda has everything.
Pat: Well, finances, it has everything to do with it, right?
Hal: Yeah, yeah, exactly.
Pat: ...which is like, I'm not a good saver if I don't actually believe that there's a future for me that I need to actually use this money or I'm not going to take care of myself or I'm not going to educate myself if I don't believe there's a future. Also...
Scott: And to your point there, Pat, like, joking about the Lincoln National Advertising years ago with the guy sitting in first class because he saved well. Most people, they're just concerned about not being poor.
Pat: That's right.
Scott: Right? For 99% of Americans who didn't hit the top 1%, they're concerned about being able to maintain their lifestyle and they don't want to be 70-75 years old and having to rely upon their children.
Hal: That's exactly right. And, you know, that's a different version of wealth, right? You know, because you could argue, of course...You know, of course, when the financial services companies are making the ads, they're trying to get you to think about that, you know, the luxury retirement, but there's another version [crosstalk 00:42:52].
Scott: Yeah, I know, the yachts and the...
Pat: Oh, yeah.
Hal: Yeah, I'm sure.
Scott: Like, everyone loves sailing.
Hal: We've seen those things before.
Scott: Like, everyone...
Scott: Great, yeah.
Hal: There is a beach there somewhere too, and people, you know, holding hands. But, yeah, that's a different form of wealth. And I think it's another way to think about that sort of tradeoff between now and later. But, you know, let me add one other thing though. It's not just about not spending now and saving later because the flip can be true as well, which is what sort of experiences do you want to spend on now so that you have the memories later?
You could also miss out. You wait so long and now it doesn't really make sense to take that trip or do that thing that you've been planning for.
Scott: ...or one of your loved ones is no longer there, or you no longer have the health for...
Pat: Which by the way, thank you for the shout-out in your book against FIRE, which if anyone's listened at this show any length of time, when this first thing came out, we just thought this is...
Scott: Financial Independence Retire Early is what...
Hal: Early, yeah.
Pat: Yeah, we just thought this was just the dumbest crap you could think of. I mean truly. Like, is that what life's about?
Scott: I just read an article a couple of days ago that it's dead.
Pat: Well, it is dead. Well, yeah.
Hal: Yeah, I mean it's, like, you know, some of the principles make sense, but, man, the idea..." Yeah, sure. I'll just never do anything fun so I can retire," and what good is that? Kind of work forever.
Scott: Haven't had a date in eight years because I'm saving so I can retire at 41.
Pat: To do what?
Scott: You'll be quite the catch.
Scott: All right. So, this does kind of dig in...So, what are the three principles...? Oh, before I go to that question, nature or nurture? Do you think that people that save...
Hal: Look, it's the [crosstalk 00:4438] code, right?
Scott: ...that see themselves' future self, is that...If I could see my future self better, is it because of nature or nurture?
Hal: Yeah, I mean, look, the reality is we don't have the sort of, you know, the research to actually speak to that balance. I would have to make an educated guess by so many other personality...you know, so many other aspects of personality, that's a little bit of both, right? If I grew up and I've been taught that, you know, there's value in saving and there's value in thinking about the future, that's nurture, and that's going to trickle down. But of course, you see other cases where people don't have that, and yet, you know, somehow, they sort of eke it out, and they figure it out, right?
So, I'm sure it's a balance. That's the worst, you know, answer that...My students hate when I give that answer and say, "Well, it depends," you know, but that's kind of the answer there.
Pat: But you are a professor, so that's okay.
Scott: What do you kids think?
Pat: Yeah. All right. Mistakes we make, miss our flights, poor trip planning, pack the wrong clothes. Just kind of briefly, "Miss our flights".
Hal: Yeah, basically, it's the idea that we get so anchored on the present that we fail to look up and somehow miss out on what's happening in the future. It's almost as if we forget that it's even there.
Pat: Listen, in business, we say it all the time. What we did yesterday is irrelevant, right? If it works, continue to do it. But just because we started it, doesn't need to continue it. "Poor trip planning."
Hal: Yeah, the idea that I might think a little bit about the future, but I do it in kind of a surface-level way and arrive at a future and realize nothing's really been planned out. You know, it's the version of going on a trip and you have a limited amount of time, and you get on the ground and then you realize, "Oh man, I've got to spend half my time here figuring out what I'm going to do next." And I know there's real value in spontaneity and all that stuff too. And I believe it.
But, you know, there's another sort of problem here, which is when I say, "Oh yeah, I'm going to...I'll worry about things later," and then later arrives and you realize, "I really wish I had put myself in a better position," right?
Pat: This is in fact...This is a trip and just showing up won't always work.
Hal: Exactly, exactly.
Pat: Packing the wrong clothes?
Hal: Yeah, and that's the idea of...well, you know, the trip metaphor there is, you know, let's say I'm in Chicago. It's cold and I'm going to a warm-weather place. So, I say, I know it'll be warm there, but I can't escape the idea that it's cold around me and I pack, you know, half my bag with some sweats just in case. So, then, I get there and realize, "I don't need any of that stuff." And the translation to the way we think about ourselves over time is that sometimes we do plan for the future. It's not that we're not thinking about it, but we get overly anchored on the feelings that we're having right now when we project those ahead onto our future selves in a way that may be almost unfair to them.
We're not really sort of giving them the benefit of changing interests or preferences. And we've sort of locked ourselves in the plan that we made now because of something that mattered to us right now but might not later necessarily.
Pat: And this goes right to the financial planning when there's a life change in someone's world, we like to tell the clients, "Look, let's just step back for a minute. Let's just let things calm down." And remember, Scott, you had someone came in and they had just retired, and he was diagnosed with terminal cancer, and we took all the money out on the markets because they wanted to talk about the markets. We're like, "Look, this isn't the time you should worry about the markets. This is the time you should worry about each other and your time together and everything will be okay."
Scott: Yeah, in the short future.
Pat: In the short future, right? You know, you were planning on this long trip, and we now know it's gonna be a short one.
Scott: Let me ask you this question, Hal, because it seemed like most of us either spend our thoughts on the past, remembering the good old days, or anxious about the future of all the calamities that might strike us. And, like, so there's a lot of discussion about living in the now and being present and that sort of thing. And that's something I try to focus on sometimes. My mind starts getting wild. Then I step back, I'm like, "I'm with some cool people right now in a cool spot. Why am I complaining about the election or whatever it may be, something stupid?"
So, how do we balance living in the moment and being present today in this moment while still having...projecting our future self?
Pat: ...and not being angry about the past?
Hal: Right. Oh, there you go. That's easy.
Pat: Said the Irish guy.
Hal: Yeah, you could go to a therapist for 40 years and not talk about all that stuff. No, I mean, look, you know what's interesting about this is that, you know, when we talk about planning for the future, no one's saying that you shouldn't also be living in the present, right? You know, it's like, there's a version of this where you're just kind of, you know, you're either ruminating on the past or you're so anxious about the future that you're just kind of circling around and you're not doing anything productive.
But, you know, you can make plans for the future and still be present, you know, like, living in the moment, right? Now, I think there's a part of the confusion arises because people hear that term, you know, "live in the present" and they think...their minds automatically go to, you know, sort of just like being in the now and living some sort of hedonistic lifestyle. I don't think that's what anyone means. I think they mean don't miss out on the things that are happening right in front of you because you're so busy, right...
Scott: Yeah, that's right.
Hal: ...with your eyes toward the future or your eyes toward the past. So, I think it's that kind of recognizing that you can do both and there's a time for both, right? But no, that's not concrete, right? I wish I could say, "Well, this is the balance you need to do." I think trying to keep that principle in mind is something that's so important. And when you talk to a planner, part of what you're doing is offloading that and saying, "All right, let me plan these things and now, I can be present in the moment."
Pat: And the first time I heard, "You only live once," they said, "YOLO," and I don't know what that means. They go, "You only live once." And I said, "Yeah, but hope...But I might live a really long time." So...
Scott: That's right.
Pat: You know what I mean? So, this decision I make today might affect the future of me. Hal, we enjoyed your book immensely.
Scott: Yeah, Hal's book, "Your Future Self". And people can get that, I'm assuming, on Amazon and...
Hal: Yeah, all the places, all the places you can buy books. Thanks, guys. Thanks for having me. [crosstalk 00:51:18]
Scott: I also enjoyed your interview on Hidden Brain a couple of weeks back.
Hal: Oh, thanks.
Scott: August 14th, he was on...
Hal: Yeah. Thank you.
Scott: With Shankar.
Pat: Yeah, Shankar Vedantam.
Hal: [inaudible 00:51:26]
Pat: So, appreciate, as always. Keep those young kids coming through your institution educated, please.
Scott: You've got a kid at UCLA, don't you?
Pat: He graduated.
Pat: And keep him slightly conservative as well. Thanks, Hal.
Hal: All right, guys, good to talk to you.
Pat: We wish you well. It's always...
Scott: You know, if only every professor of psychology was that entertaining.
Pat: Yes. Maybe they are. It's been a long time since we've been there. You probably weren't the best student when you were in college either.
Scott: I do...Ah, ah, ah. I remember...Yeah, anyway, I'm not going to go there. In college, I was actually a pretty good student.
Pat: I was as well.
Scott: ...just not in high school.
Scott: Didn't quite see...I didn't see my future self, frankly.
Pat: Excellent point.
Scott: I really did not. At 14, I could not understand why anything matters.
Pat: Hence the purple hair and the earring.
Scott: So, yeah. Anyway, we're out of time. This has been Allworth's "Money Matters" with Scott Hanson and Pat McClain.
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