AI Hype, the 4% Withdrawal Rule, and Real-Life Retirement Questions
Is the AI boom driving markets too far, too fast? On this week’s Money Matters, Scott and Pat debate whether stock prices can keep up with earnings—or if investors should brace for a correction. Then, they tackle the 4% retirement withdrawal rule, explaining its history, its flaws, and how real retirees actually spend. Listener calls bring the conversation to life, with questions on 401(k) rollovers, 403(b) vs. 457 plans, and the latest Social Security changes. Finally, Scott and Pat share candid insights on why so many savers struggle to spend in retirement—and how to strike a healthy balance. Whether you’re curious about AI hype, the realities of the retirement withdrawal rule, or just want straight answers to financial questions, this episode has you covered.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
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 McLean 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 Hanson.
Pat: Pat McLean.
Scott: Glad you are with us today as we're talking about financial matters. Myself and my co-host here, both long-term financial advisors and glad to be with you on this program that we've been doing for a long time as well.
Pat: Thirty years.
Scott: Yes. Long time, long time. Well...
Pat: Scott, what do you think?
Scott: These markets...
Pat: Market meltup? It feels like a meltup.
Scott: By the way, we're recording this on Tuesday the 23rd. I don't know what day it is. Whatever, something like that.
Pat: 23rd. Yeah.
Scott: 23rd. Look at me.
Pat: Excellent. Very good. It's crazy.
Scott: Well, it's funny. I was just on vacation for 2 weeks, which is a...I don't think I've taken 2 weeks since 25 years.
Pat: Well, you're an old man now, so this...
Scott: Two weeks is too long. Ten days was my max. I should have come home. Anyway, but...
Pat: Really? The last four days, were you just not pleasant to be with?
Scott: No, it's all right. When you start counting down the days until you have hotel rooms, then it's like...Anyway, I'm not complaining. I'm not complaining about it. My point is, while I'm gone, my wife was teasing me because she's like...You look at the markets and you're like, not because they're down, because they're up again. It felt like every day they were going up and up and up. And I think the reason...
Pat: Why? Do you have a reason behind this? I have a thesis.
Scott: What is your thesis?
Pat: I think it's driven by this kind of AI mania. This is different than the dot-com because it's got bleed-over into regular companies.
Scott: I mean, we see it firsthand in our own organization.
Pat: That's right.
Scott: The benefits of artificial intelligence.
Pat: Yes.
Scott: And some new technology. I don't know, there's no way you draw the line between AI...Everything's AI now. If it's a good technology platform, everything's AI. A great app, it's AI.
Pat: As I told my wife, she said, "Could you do the dishes?" I said, "No, AI's going to do it."
Scott: Well, the dishwasher does a lot of it. You've got to admit, right? And the fact that water comes up through, it just magically appears in my sink.
Pat: And it's clean and we can drink it is pretty amazing.
Scott: It is very amazing. You take it for granted. I mean, I think what makes me nervous about the markets, the prices of...particularly some of the handful of really large tech companies have gone up much faster than the profits have. And so the bet is that the profits are going to catch up. And even, frankly, with a lot of other companies, it's just...
Pat: The price-to-earnings ratio has gotten large.
Scott: Yes. So people are...
Pat: Relative to history.
Scott: Correct.
Pat: Especially in a high interest rate environment. I understand it in a low interest rate environment.
Scott: Yeah, because I think people kind of forget...In order to have a return on owning a company, whether it's a public-traded company or private company...
Pat: Whatever it is.
Scott: ...the market value of that is going to be based on two things. One is how much earnings that company has.
Pat: Today. Right now.
Scott: Yeah. How much earnings. And two, what kind of multiple or how many times of that earnings is someone willing to pay? So as an example, let's say you got a corner gas station that's earning you $100,000 a year.
Pat: How many years earnings would I pay for it?
Scott: Right. So a price-to-earnings multiple, let's say, would be...Let's say it's 25. That would mean that gas station would sell for $2.5 million to generate $100,000 [crosstalk 00:04:05.592].
Pat: Which means that I would take 25 years' worth of earnings to pay for it.
Scott: Yes. That's correct. That's about what the market is. A little more than that, the broad market. But here's what can happen. Let's say you go buy that corner gas station. You're excited about this. I'm getting $100,000 a year earnings on it. And let's say over the next decade, that doubles to $200,000 in earnings. But over that time, investor multiples, what an investor is willing to pay for a year of earnings, let's say it drops from 25 to 12.5.
Pat: Then nothing changed in my world.
Scott: The price of that gas station is the same 10 years down the road, even with twice as much earnings.
Pat: If I'm interested in resale...
Scott: If you're interested in resale.
Pat: ...versus just income.
Scott: Yeah, they go hand in hand. I mean, it's still...
Pat: Well, it does price.
Scott: It does price.
Pat: It does price.
Scott: I mean, I think that's what, when you look at the overall markets, the market is pricing in that AI is going to dramatically help companies in their efficiency, which means they can cost effectively grow without having to bring on a lot more labor or more expensive, and they can afford to pay for the technology.
Pat: It's going to float all boats.
Scott: That's what's being priced down.
Pat: And I believe that.
Scott: I do too.
Pat: I absolutely believe it. The question is, to what degree?
Scott: Yeah. And have we overbid? Are we up higher than what's realistic?
Pat: We don't know.
Scott: Are we still underbid? Who knows?
Pat: But my point being is that if I worry about AI at all, it's not the efficiencies that's going to come from it. It's the societal issues that...
Scott: Yeah. But it's interesting. I was just even this morning reading some headlines and one of why the economy is heading for stagnation. No, it was a completely negative one. Then I saw another one that was very bullish. Nobody knows.
Pat: No, we don't know either.
Scott: Nobody knows.
Pat: No one knows.
Scott: Which is why guys like us and gals like us, financial advisors, talk about, look, particularly as you get further along in life, it's about...typically you're more concerned about maintaining your standard of living than you are about increasing it. So if you've got enough extra that you can also bet like, hey, if things work out really well, I can increase my standard of living. Fine. But I think for a lot of people, approaching retirement age, let's make sure things are set up in a manner that give you the highest probability of success.
Pat: I'd rather not be poor than rich. Not be poor. People get confused. They think they want to be rich, but really what they want to be is not poor.
Scott: And what is rich? I mean, think about this, Pat. We have thousands of clients, right?
Pat: Yes.
Scott: The guy with the million says, "I'm not wealthy. That guy over there, he's got $2 million." The guy with $2 million saying, "I'm not wealthy. That guy over there, he's got $5 million." The guy with $5 million says, "What are you talking about? My neighbor's got $10 million."
Pat: Oh, my wealthiest client, if you met him, I mean, he screams poor every time I talk to him. I tell him, I said, "You're like a man with a ham under his arm crying hungry. You gotta stop."
Scott: He's not going to stop.
Pat: He's never going to stop, which is probably why he has a lot of money.
Scott: Anyway, it's an interesting time. I like when earnings grow faster than stock prices because it gives you opportunities to think this is a great buying opportunity. Right now, look...
Pat: The PE ratio...
Scott: ...the stock market can go way up further before there's any sort of correction. We have no idea when a correction is coming.
Pat: That's right.
Scott: It will come again. A bear market will come again. We just don't know when that's going to happen. Nobody does.
Pat: I think if we see a correction, Scott, it's going to be relatively short term because there's so much cash on the sidelines.
Scott: Almost $8 trillion in money markets right now.
Pat: That's right.
Scott: A record high. A lot of money in money markets.
Pat: That's right. That's right.
Scott: Interest rates, Fed just cut rates and the market's betting that they're going to continue to cut rates throughout the rest of the year.
Pat: Yeah. And so there's so much money in...so that there is a disruption of, let's say, 10% to 15% I think that cash will flow in. That's my opinion.
Scott: You might not be right.
Pat: Oh, that's correct. But I might be. Who knows?
Scott: But you don't want to have investment policies based upon your opinions.
Pat: Oh, correct.
Scott: Right? So I think right now, look, if you're sitting there thinking, wow, I can't believe how much my accounts have grown over the last couple of years, probably a good time to take a look at what your overall allocation is. Maybe it's time to pare back a bit. I mean, let's say a couple of years ago, you had 50% in equities, publicly-traded equities, the other 50% in other assets, today, you might be 60%, 65% in equities because the kind of growth we've had.
Pat: Correct.
Scott: Great opportunity to bring your allocation back to more in line with what you think is reasonable.
Pat: Well, do most people actually...I hope most people have some sort of an investment thesis and then stick to it, but I doubt it.
Scott: Well, you know that most people, I mean...
Pat: Yes.
Scott: Anyway, but I'd rather the markets go up than go down.
Pat: Yes. And so how was your vacation?
Scott: It's good. Back late last night.
Pat: Fourteen days.
Scott: Too long. I shouldn't be complaining about having it too long. And I'm playing with this [crosstalk 00:09:26.621].
Pat: I know. Are you giving me [crosstalk 00:09:28.779]? But you ran a marathon. Where?
Scott: Berlin Marathon on Sunday, two days ago as of this recording.
Pat: And is it the same distance in Berlin as it is in the U.S.?
Scott: 26.2 miles, a standard marathon. Yes, that is correct. You know, surprisingly...
Pat: But they call it kilometers there, do they not?
Scott: Forty-two kilometers, and a little bit more, which I wasn't aware of. I should have...
Pat: So it's not 26.2 miles.
Scott: Well, I don't know how many 42 kilometers is. I think it's 42 and some change. But I thought the Brandenburg Gate, this kind of historical gate, I thought that's where the finish was.
Pat: [crosstalk 00:10:05.610]
Scott: I gave it everything I had. I got there and I looked, and the finish was like a few more minutes ahead. It was hot, record heat, about 80 degrees, humid.
Pat: And you ran it with...?
Scott: They didn't have enough water for the Germans. It was very disorganized, I felt. I was actually quite surprised.
Pat: The Germans?
Scott: I was quite surprised how...
Pat: That the Germans were disorganized?
Scott: ...it was hard to find the start. There wasn't a lot of people guiding us.
Pat: And your daughter, Jessica, ran it with you?
Scott: She ran it as well.
Pat: Did she beat you?
Scott: No. No.
Pat: Really?
Scott: Well, she's an ultra marathoner, so she trains for slower, longer distances. So she just did this as a training run.
Pat: Oh, just for fun.
Scott: But a lot of people had struggles because it was so hot and there wasn't enough water. I got behind on fluids. I don't know why I do these things.
Pat: I got to tell you, I'm with you. I've just decided never to run a marathon.
Scott: I'm 59 and I'm still able to do 'em. [crosstalk 00:10:59.107] It's like, I'm grateful I can still move. I don't know.
Pat: All right. Let's do some calls. What do you say?
Scott: Yeah. And if you want to join our program, 833-99-WORTH is our phone number. You can call and schedule something or, maybe even an easier way, just send us an email at questions@moneymatters.com and we will set up a time to get you scheduled to be on the program here. Let's start off here in California with Zach. Zach, you're with Allworth's "Money Matters."
Zach: Thanks, guys. So I just started a new job and it's in the public sector. So now I'm with STRS and they also have, oh, sorry, 403(b) and 457. I have an old 401(k) and I just wanted to know, is there a preference and which one I should roll over to use? And if and when I roll it over, like if I want to do alone, is there a limitation on that?
Scott: And so right now, it's a 401(k) not a 403(b). Is that right?
Zach: Correct.
Scott: Okay. All right.
Pat: And for the rest of the listeners, STRS is the State Teachers' Retirement System in the State of California.
Scott: And it's crazy how many different retirement plans. Right? It sounds insane.
Pat: It makes no sense.
Scott: 401(k), 403(b)...they're all relatively similar.
Pat: Similar rules, but not identical.
Scott: Slight nuance in some of the differences. But the fact that we have all these different things...
Pat: Kind of crazy.
Scott: And how old are you, Zach?
Zach: Forty-seven.
Scott: So in a 401(k), now that you've left your employer, you cannot take a loan on it. And if you roll it into an IRA, you cannot take a loan on it. If you roll it into your 403(b), you can take a loan on it.
Pat: Up to $50,000 or half the account balance.
Scott: Why would you want to take a loan on it?
Zach: Oh, I just want to know that, like, nuances and all that stuff.
Scott: So here's the difference between the two is a 457 is much more liquid at severance of employment than a 403(b).
Pat: Because it doesn't matter your age. When you separate service, money in 457 can be accessed without any early withdrawal penalties. You don't have to be 59 and a half. You can be 47 or 52.
Scott: But not all 457s accept 401(k) rollovers, but a public entity 457 normally accepts a rollover.
Pat: But a 457...Here's one difference between the 401(k) and a 457. A 401(k), it is a payroll deduction...I was going to call it a scheme, but [crosstalk 00:13:47.679].
Scott: [crosstalk 00:13:48.439] in Europe.
Pat: System, program where you take a portion of your paycheck and you say, I'm going to have these dollars allocated into this account that's set up in a separate trust. It's not the company's assets. It's protected from the company's creditors. On a 457, it's based upon the employer. So it's technically a deferred payroll. So the company...basically your employer says, "Instead of paying you 100% of your pay today, I'm going to pay you 90%. The other 10% I'm going to set aside. Oh, by the way, I'm going to let you decide how it's invested." But it's still technically subject to creditors. So if it's some tiny, bodunk municipality, we'd probably say avoid the 457.
Scott: But in your case, I'd just move it to the 403(b). I mean, if you were my little brother, I would just say, yeah, just move it to the 403(b).
Pat: Assuming you've got a good 403(b) that's not a high cost one, because some of these are old annuities.
Scott: But he's at STRS. So I assume you work in a school.
Zach: Yes.
Scott: OK. And so the menu of the 403(b)s is pretty wide. So my my daughter was a member of STRS. So we picked a really low, low cost.
Pat: Yeah, there's low-cost options.
Scott: Yeah. But but there are people that come to your lunch room, they bring in pizzas. Do you ever see these people?
Zach: I'm too new to see that happen.
Pat: They still do that?
Scott: Yes. I asked my daughter.
Pat: They still come in?
Scott: Yeah, they still come in.
Pat: And try to sell you...
Scott: Yeah, and try to sell you...
Pat: It's a weird structure.
Scott: 403(b), yeah. But you have a big menu of choices there and just rolled into that and you can take a loan against it, it's easy.
Pat: Did that help?
Zach: Yes. So one last question, if you don't mind. I also noticed that I'm no longer paying into Social Security. So with my service in a private sector, when I retire, I can still collect Social Security, correct?
Pat: Go fish.
Scott: You can as of now.
Pat: Yeah. Because they just...
Scott: The Windfall Elimination [crosstalk 00:16:04.951]...
Pat: Was just eliminated.
Scott: The WEP.
Pat: So it used to be that if you paid into both, you could collect Social Security, but it would be offset based upon the pension you were receiving during those years that you did not pay into Social Security. But that was just eliminated in the One Big Beautiful Bill.
Scott: Two months ago, three months ago.
Pat: And I don't know when that kicked in, immediately or it kicks in for 2026?
Scott: I don't know when it kicks in.
Pat: Although, I was visiting with a friend and his wife was a retired schoolteacher. She was lamenting how she couldn't collect Social Security. And I said to her, "Who's your financial advisor?" And she said, "Well, this guy." And I said, "Well, he's not doing...he should have told you."
Scott: So, yes, you can collect both.
Pat: Well, I would not plan on it in your situation. I mean, look, by the time you go to collect Social Security, the Social Security Trust Fund will be bankrupt. There won't be...
Zach: I understand that.
Scott: Okay, so why don't you plan on not...There's a good chance that that Windfall Elimination Provision comes back at some point in time.
Pat: I think so. They gotta find some ways to reduce benefits.
Scott: Anyway. Yeah.
Pat: All right. I have a question for you. Are you a schoolteacher?
Scott: I got a question for you.
Zach: Sorry, say that again.
Pat: Are you a schoolteacher?
Zach: Yes, I am.
Pat: Were you a schoolteacher previously?
Zach: I was, but in the private sector.
Pat: Oh, you were.
Zach: It was not a public school. Yeah.
Pat: Very nice. And what grade?
Zach: College level.
Pat: And what grade are you going to be teaching now?
Zach: Same, college level.
Pat: Oh, got it, got it. Okay, very nice.
Scott: Well, good. Well, thank you.
Pat: Wait, wait, one more. What subject?
Zach: What's the term they're using it for nowadays? Career technical education.
Pat: Okay. All right. Well, thank you for serving.
Scott: Yeah. I don't know what that means.
Pat: It helps people get jobs.
Scott: That's what it sounds like. It sounds pretty important.
Pat: Yes. Yes. Yes. Some might actually be able to get a job after your.
Scott: But Pat, with these...
Pat: Follow your dreams, Scott.
Scott: Look, the further someone is away from retirement, from planning standpoint, the more you got to look at what government benefits are going to be there for you?
Pat: What probability of these promises are going to be there?
Scott: Because even if you look at Medicare, right? So right now, if you're a high-income retiree, your Medicare Part B premiums could be several hundred dollars a month versus if you have a more modest income, which is a hundred bucks a month.
Pat: Yeah, or close to zero.
Scott: Or close to...yeah, depending. So it's one way of taking away benefits, right? If they're going to charge you more...
Pat: It's needs based.
Scott: That's how Medicare is today. And you kind of wonder, if you look down the road...
Pat: Will it be $3,000 a month, $5,000 a month? I mean, what will it be?
Scott: The cost of medical care, it's phenomenal. It's staggering. Look at the percentage...
Pat: Twenty percent of our GDP in the United States. Twenty percent.
Scott: Yeah. But we have great...
Pat: And if you look at most of the jobs that have been created recently, they've been in the medical sector. But look at our...
Scott: Oh, I know, pat. I'll never forget, years ago I had a client who's retired and he comes in and he's talking about his knee replacement, how awesome it is. He's able to golf again. He says how much pain he used to be in it. "It's so good. I'm golfing three days a week. I haven't been able to do this." And then 10 minutes later, he's complaining about his his medical premiums. He was retired, had medical care. Relatively young retiree, had medical care from his employer and his co-payment went up, whatever it was.
Pat: Yeah, and the knee...
Scott: Not even very much. There was a complete disconnect. But I said, "You got a brand new knee."
Pat: And what's he say?
Scott: "Well, I guess you got a good point there."
Pat: But like a knee is a lifestyle. He wasn't going to die from a sore knee. He would just be uncomfortable and couldn't play golf.
Scott: Well, to some people, that would equate to death. I'm not a golfer, but I do know some of those guys. You know 'em too.
Pat: I do.
Scott: Yeah. All right. Let's continue on with our calls here. We're talking with Ken. Ken, you're with Allworth's "Money Matters."
Ken: Hey, good morning, Scott and Pat. I feel very honored to talk to you guys. I've been listening for 30 years.
Scott: Oh, wow.
Ken: I'm stationed here and happy to have a chance to chat with you. I got two questions about the so-called safe withdrawal rates within retirement accounts. And I know I guess this Bergen study had kind of targeted about 4%. And then listening to y'all, it sounds like you kind of work with about 4%. And I read recently that he had modified that and he was saying now about 4.7%. So my first question is, what do y'all think about that and what number do you use? And you want the second question now or...?
Scott: No, let's talk about that. Yeah. So the 4% rule, essentially, here's the premise behind that. You go into retirement, you take 4% of your portfolio out as an income, and then you ratchet that up each year with inflation. Right? And the theory is if you go look at all the economic cycles, it gives you about a 95% chance of success rate.
Pat: And when you say portfolio, what's the stock-to-bond mix on that, Scott?
Scott: On the 4%? I don't know what it is.
Pat: I think it's 60-40 or 70-30, somewhere around there.
Scott: It's probably 60-40, somewhere there. So I think it's a good rule of thumb. I think for somebody saving for retirement, if they can get and say, man, 4% of my portfolio, it's going to work out plenty of income from retirement. I think that's a fantastic place to be. Here's what...
Pat: It's a good place to start.
Scott: Correct. Correct. It really is. And if you can get there, I think you've got a very high probability of success in retirement of not having to go backwards on your income. But the reality is this. When we go through these downturns, people tend to spend less, even those that have the assets. So if I go back, like the financial crisis, I can remember having conversations with clients, people who had done extremely well, saved a lot, could afford to do whatever they wanted to do, and they would say things like, "I just feel a little funny about going on this two-week cruise when my my good friend is laid off right now," or things are tight because...And so even people with means tend to cut back some of their expenditures during times like that. And the 4% rule completely ignores that. It ignores any sort of what's happening in your life, what happens as other things occur, such as illnesses within the family and bum knees you can't travel on.
Pat: It ignores actually people. I remember I had a client, he was crazy, just crazy. It was awesome. I really enjoyed him. But he wanted to take 8%. I said, "You're going to run out of money." He said, "There's no way, Pat." He said, "I'm going to die in the next 10 years." And he was right. He was 100% right. He told me, he said, "I live hard and there's no way I'm going to make it." And I said, "Well, you will run out of money." And he said, "I will be long dead before I run out of money." And he died like seven years later. So...
Scott: I think it's a good starting place. Yeah, absolutely. But there's other factors that come in. I mean, sometimes people have a house that's going to be repaid off within seven years of retirement, or there's other factors going on. So I think years ago, before there was sophisticated software, probably a good rule of thumb, and it's a good rule of thumb in your planning, but there's much more robust systems today that can look at your exact situation.
Pat: Even the financial planning software has problems in it because it ignores series of return sequence events.
Scott: Yeah, but you can plug some of those things in and give you some sort of...But it's still based on assumptions.
Pat: That's right.
Scott: And then humans are the ones that come up with the assumptions. And based on my experience in the financial markets, humans can talk themselves into whatever assumptions they want to make the model work, whether it's retirement or buying companies or whatever it might be.
Pat: Do you think?
Scott: I mean, look at the financial crisis, right? The brightest minds on Wall Street all had these models.
Pat: Yes. It's never...
Scott: All based on assumptions. Faulty assumptions, it turned out.
Pat: Yes. That they made up and then relied on, and then went to boards of directors and actually sold.
Scott: Okay, second...Does that answer your question?
Ken: Yeah, it sure does. Yeah, it is a rule of thumb and you kind of work from there.
Pat: I would be...like if you came into my office and we looked at your financial plan and you said, "I'm going to take out a 4% distribution and adjust it for inflation," and you had a 60-40 portfolio, I would say absolutely.
Ken: Okay. And that kind of leads to my second question, as you mentioned, is this idea of adjusting that rate for inflation. Because it seems to me that there are two things going on as we go through time. One is theoretically the value of your assets is going down because you're drawing, but also they are responding to it and it may be increasing.
Pat: Can we stop for a second there?
Ken: Absolutely.
Pat: When you said the value of your assets are going down, the 4% rule is designed so that you value go up.
Ken: Yeah, okay, got it.
Pat: Right? In fact, the concept of spend down, unless you know your dying day, you really don't want to spend down.
Scott: Oh, my gosh. First of all, emotionally, it is a terrible thing to watch.
Ken: Oh, yeah.
Scott: I mean, just psychologically.
Pat: Well, that's again where the 4% rule doesn't...like, when your account values are shrinking, you might thinking, maybe we'll just cook in tonight, honey, instead of...or, I don't want to see the wine list tonight. You know what I mean? You just think about things differently.
Ken: Okay, well, then if that's not happening, that assumption is basically that you're going to effectively die with the same number that you started with.
Scott: That's correct.
Ken: Then it might be going up with inflation. You might actually be outperforming your 4% withdrawal.
Scott: On a nominal basis, yes. So the the dollar amount, the purchasing power might not be the same, but the dollar amount should continue to increase.
Pat: But your behavior in retirement...the effects of inflation is much different for a retired person than it is for someone that's raising four kids, if in fact that exists anymore. Your spending is so much different, right?
Ken: Yeah. So it sounds like you all are comfortable with roughly this 4% start and with this idea of looking at inflation and doing, like, an annual adjustment on the rate of your withdrawal.
Scott: That's that's correct. That's correct.
Pat: And with that sort of formula, it's impossible to run out of money because it's based upon taking a percentage of your portfolio.
Scott: Not a dollar amount.
Pat: Right. But Scott, so he comes in with a million dollars. You start a 4% distribution. Right? So we're doing...
Scott: Let's say it's all in stocks. There's a horrible bear market. And it falls to $500,000, 4%, now you just cut your...you're taking out half as much as you were before.
Pat: Yeah. But typically you don't cut it in half, but you cut it some.
Scott: You mean realistically what humans do.
Pat: That's correct.
Scott: That's right. You see your million dollars in retirement fall to $500,000, my guess is you're changing your spending a little bit.
Pat: That's right. That's right. That's right. So I guess
Ken: That sounds good.
Pat: We just said we completely agree with the 4% rule except for all these other reasons.
Scott: I mean, look, no one likes downturns in the market. Right? Recessions, they're brutal. And no one likes seeing their portfolio decline. But we're going to have periods like that in the future. And no one likes adjusting their spending. But it's not that hard to adjust your spending when everyone else around you is having to adjust their spending. Doesn't feel as painful. It feels prudent. It feels like you're doing something to have some control over things that you have no control over, the markets.
Pat: Yes.
Scott: That's one thing you can control in retirement is your spending.
Pat: That help?
Ken: Correct.
Scott: Are you retired now?
Ken: Yes, absolutely. Yeah.
Scott: Are you taking 4% out?
Pat: Twelve.
Ken: A little less than that.
Pat: Oh, you're good.
Ken: [crosstalk 00:29:18.505] saying this, I was thinking, well, you know, maybe live a little larger or make sure. And when I saw that that's rule of thumb, and I've been told a rule of thumb is a great way to lose your fingers. That the rule of thumb was [crosstalk 00:29:32.698].
Pat: How old are you, Ken?
Ken: I am 68.
Pat: So the reality is even if you're in great health, even in your great health, your ability to spend money is between the ages of today and typically 78, 79 if you're in great health. I only have a few clients that travel in their 80s. So if you're traveling now, I would encourage you to...
Scott: Very rare in your 80s.
Pat: Very, very rare.
Scott: Maybe there's cruises. Cruises are a little more common.
Pat: Yes.
Scott: But as your health starts to deteriorate, it's not that easy getting on a plane and moving around, or getting in the RV, or going to visit the relatives. And so I will actually encourage clients to actually spend more money in their 60s and 70s.
Scott: Or if you have like these are three or four things I'd like to do in my lifetime, maybe it is carved...How much will that cost? And you carve that out the rest of your portfolio and you give yourself permission to spend that in the next decade on those three or four things or whatever the number is.
Ken: That's a good structure. Yeah, I like that.
Scott: It is a good structure because then it's like, okay, that's what these dollars are for, because it's this weird balance. This past weekend, I don't know if you saw this, Pat. Jonathan Clements died and Jonathan Clements...
Pat: I didn't see that.
Scott: I'm sorry. Yep.
Pat: Oh, that's awful. He was a young man, wasn't he?
Scott: Sixty-two.
Pat: Anyway, let's finish up this call.
Scott: Well, it's germane to this.
Pat: Okay, okay.
Scott: And Jonathan Clements was a personal finance writer for "The Wall Street Journal" ever since I could remember. And then he must have got squeezed out during some cutbacks from the paper.
Pat: He was great.
Scott: And then but he's still been writing "The Humble Dollar" that I subscribed to his newsletter. He'd been doing it for years and he came down with some sort of terminal cancer year, year and a half ago. And he wrote about that.
Pat: I remember reading about that.
Scott: But what I think...and the reason I'm bringing him up, because he was big on preparing for...He wrote for individuals, right? For families, individuals, here's how to save for retirement. He wrote about things like the 4% rule, paying yourself first, all these basics to make sure that you've got enough money in retirement age, the later part in life, so you're not dependent upon your own labor to produce income for your lifestyle. Right?
Pat: That's what retirement savings is.
Scott: Then he dies at 62.
Pat: Did he write about...? I didn't read that much of his stuff, but...
Scott: And I thought, it's a shame. Here's someone who really helps people prepare for their future economically, financially so that they have some freedoms the latter part of the life, and he's taken out at a relatively young age. And it just reminded me of that kind of balance. And those that tend to be the best savers are the ones that have the most trouble spending in retirement. And you can't take any of these things with you. You can't take a dollar with you.
Pat: Yes.
Scott: It all gets left to somebody.
Pat: And your kids will spend it.
Scott: Differently than you do.
Pat: Most likely, yeah. So anyway, it's a balance. It is a balance. But 4%, 5%, you're 68. Yeah, have at it.
Scott: Appreciate the call, Ken. And yeah...
Pat: I didn't see that he died.
Scott: Yeah, I got a text from somebody last night. I guess...I don't know when he passed away. But yeah, it's a shame, but it was also I just thought one of those, huh.
Pat: But at the same time, you...
Scott: [crosstalk 00:33:07.925] I know.
Pat: Oh, and I have a...I'm 62. I turn 63 in a couple months. I have a hard time spending money at points in time. I mean, you've known me for 35 years. I can be really, really cheap, like really, really cheap.
Scott: I think part of it is it's a way to feel like you still have some...Because I'm the same way. Unless there's a huge line at Costco, I get my gas at Costco. And my friend was laughing at me. I said, it's really not going to have any difference in my life and my standard of living.
Pat: You feel good about it, though.
Scott: But I feel good about it. I feel like I'm doing something responsible to save the few dollars I have. I don't know.
Pat: I get gas at Costco 85% of the time.
Scott: I mean, because part of it, I drive by it all the time. If I didn't drive by it, I would probably do something different. But yeah, to your point, I think it gives you a sense of some sort of control over things.
Pat: And look, I remember when I had...I remember when you were living in that fireman's bedroom.
Scott: Yeah, very small bedroom I rented when I moved to Sacramento. I moved to Sacramento in 1990, Pat. I'm sorry, 1991. Pat and I met, we worked at the same company together. I was in the Bay Area and I transferred up in January of 1991. I had no money.
Pat: You had a Rabbit. Was it a Rabbit?
Scott: The Jetta. The engine fell out.
Pat: Sorry.
Scott: Literally.
Pat: I called it a Rabbit and, in fact, it was a Jetta.
Scott: The engine fell out. Well, when that happens...
Pat: It's not funny when it happens.
Scott: When that happens, the car comes to an immediate stop, by the way.
Pat: So you we driving it.
Scott: Yeah, I was pulling into 7-Eleven something like that. [crosstalk 00:34:53.656] a complete stop.
Pat: You get out and then did you see the engine on the ground?
Scott: There's something about the motor mounts that you're supposed to pay attention to.
Pat: Wait, wait. Truly, did the motor...?
Scott: That is correct.
Pat: It touched the ground?
Scott: Well, it was on the ground, yes. The motor fell out. I wasn't exaggerating.
Pat: Did it rip out the oil pan? Was it leaking oil?
Scott: No, no. It was a quick stop. Abrupt stop. Oh, yeah. I moved to town January of 1991. I rented a bedroom from some stranger because I couldn't afford my own rent.
Pat: This is a long life story.
Scott: It's a short life story.
Pat: But I asked. I did ask.
Scott: But there's some of these things that stick with you, right?
Pat: Yes.
Scott: Like spending.
Pat: You can't change that.
Scott: It was $300 a month, my rent. And I remember I had a couple months I did not have the $300. I took a cash advance from my credit card. I'm a financial advisor, full disclosure. When you're trying to start something, right? I could have went and got a job at Pepsi. They would have given me a company car and all that. I could have had a sales job at Pepsi. But I thought I could make it as a financial advisor. I'm going to...
Pat: Did you have a job offer for Pepsi? Where did that come from? Where did the Pepsi thing come from?
Scott: That's what my mom would tell me.
Pat: Jealous? Getting a job at Pepsi.
Scott: I don't know if it was Pepsi.
Pat: Go sell some sugar water.
Scott: "Billy has a job with Pepsi and he gets a nice wage and a company car. Why don't you go work for Pepsi? You can get a company car and a nice wage." I don't know if it was Pepsi. Whatever.
Pat: No, I get it. My first job out of college, I had a company car.
Scott: Yeah, you had one of those jobs. It wasn't Pepsi. It was something different. So my point...So I remember those times and I remember, like, who's got the lunch special that day. If I didn't bring my lunch, which I brought my lunch off. But if there wasn't one, like the Mongolian Grill had a special on Tuesdays or whatever it was. I had to make it work.
Pat: And that stays with you.
Scott: Some of those things stay with you.
Pat: And in retirement...So we see people that move into retirement that are great savers. And oftentimes they have the hardest time...in retirement is changing that behavior. It is a really difficult thing to go from saving to spending.
Scott: You spent your whole life stacking wood on the wood pile. And suddenly you're going out and pulling it out.
Pat: It's very difficult. I have a client, a family. He retired, owned his own business. And he, in the last three years, would start giving money to his kids. And he always said to me, "Better than from a warm heart than a cold hand." And he gave it to them...He said, "They're going to get it anyway." So he started giving it away.
Scott: Was he older or had ample assets?
Pat: He was older. He was in his mid 70s and ample assets. But he died eight weeks ago. Just he dropped out at dinner one night. And that just sticks with me. Just this, "Better from a warm heart than a cold hand. "Yeah. He said, "You know, I'm never going to spend it, and and they will. And it will improve their life and I get to see it."
Scott: You know, I'll be very transparent here. One of the challenging things about being a financial advisor, you want to have these conversations with people, but there are times that they could take offense to it. And I'll never forget. I've been an advisor...I think I was able to afford rent at this point. Maybe I had a house.
Pat: You were a hitter.
Scott: I had a little financial stability in my own life.
Pat: Was it last year?
Scott: But talking this couple, they had, I don't know, it was close to a million bucks in their 401(k). This was 25 years ago, 30 years ago.
Pat: So a million dollars is a lot of money.
Scott: Yeah, it's the equivalent of about two today. Right?
Pat: Yeah, two or two and a half.
Scott: And they weren't spending a dime of it. They were taking their required minimum distribution.
Pat: So they're retired.
Scott: Retired. They lived on Social Security. That's the only money they spent. They took the required minimum distribution, sent them out to the tax man, and had the rest go in another account to be invested. And so I would talk to him about it like, "Hey, why aren't you spend in some of these dollars?" and have these conversations. And came in for the review and...Let's call him Bill. Bill comes in by himself and I said, "Where is Susie?" And he says, "Well, that's what I wanted to talk to you about." I said, "What?" He says, "Well, Susie didn't want to come in because she feels like every time she comes in and sees you, you call her cheapskate." And I never called her cheapskate. I was trying to help them, like...
Pat: Consume the money?
Scott: ...do something with these dollars, to actually use them...
Pat: Not to save them.
Scott: ...whether it's to their own good, whether it's to charity, whether it's to their kids. But like, but to your point, this client of yours said I'd rather give my kids some money now with a warm hand...
Pat: Yeah, warm heart...
Scott: Warm heart than a cold hand.
Pat: Warm heart than a cold hand. Yeah.
Scott: But I remember after that thinking, I need to be careful as an advisor being too direct with people.
Pat: Yeah. Right. And did it haunt you for days? It would haunt me.
Scott: It still haunts me today. I'm still...because I look at it and you think, I meant no offense, because I know when I'm offensive.
Pat: I've not seen that side of you.
Scott: Obviously, I still think about it. I could picture him walking into my office...
Pat: But that behavior did not change.
Scott: Their behavior did not change. My behavior changed a little.
Pat: On how you actually explained it to clients or how you didn't explain it?
Scott: Both.
Pat: Did you shy away from it...
Scott: Absolutely.
Pat: ...because of that interaction?
Scott: Absolutely.
Pat: Well, that makes sense. Look, people, whatever makes them happy, right? Maybe not spending the money...
Scott: Maybe that's what they really enjoyed.
Pat: Maybe not spending it.
Scott: Who am I to judge?
Pat: Yeah. Maybe the suffering was the point of...well, I don't call it suffering, but maybe the whole act of actually saving for the future was the point of it. Not actually spending it.
Scott: Well, clearly for them. And look, I mean, my own my mother still saves. She's 86 years old.
Pat: You should encourage that behavior.
Scott: She's 86. She still likes to set money aside. I think they still have a jar where they put coins in.
Pat: Good for her. Is she happy?
Scott: She enjoys that. To her, it gives her some satisfaction. I don't think she's taking the butter cubes at the restaurant on our way out.
Pat: Not yet.
Scott: I don't know. It's just I find the whole behavioral finance...I guess we started off with...we were talking about the 4% rule and it's all morphed into this. But it's the balancing of we're all humans. And for most people, dying with the largest amount of money is not the objective. Right? We save for the future in large part because we're uncertain. We're not sure that we're going to have a paycheck coming in forever. And we want to be in a position in life, most of us, where we're not obligated to work. It's an option that we have. If we want to continue to work in our later years, we can. But we want to be in a position that we've got the economic freedom to say, I don't want to work, or I do want to work, or I want to travel, or I don't want to travel, or I want to watch my 401(k) grow while I just live on Social Security, or I don't, I want to spend my...I mean, having some flexibility and getting to that point in life, I think it's important to...
Pat: Oh, yeah. Unfortunately...well, this is a very first-world problem, number one. It's very first-world problem. And the number of, the percentage of the population that actually gets to that point is really, really small.
Scott: That is correct. The majority of retirees...still this day, the majority of retirees rely upon Social Security for the majority of their retirement income. If you're retired and you think about what your Social Security check is, think of that as the majority of your income. That is the majority of American retirees.
Pat: Yes.
Scott: The average American household doesn't have two nickels to rub together.
Pat: Well, actually, the average American government doesn't have two nickels to rub together.
Scott: Well, they act like they do. They're investing in companies now.
Pat: Well, we'll get to that. Let's...
Scott: About to bail out Argentina.
Pat: This Intel thing, now Nvidia is investing in Intel. They said they were gonna commit $5 billion. And this is exactly what we talked about when the U.S. government...
Scott: I don't like it at all, the government picking [crosstalk 00:43:59.224].
Pat: It's awful. Well, they've done it for years.
Scott: I never liked that either.
Pat: But they had liquidity events. They could have a liquidity...
Scott: But they've done a horrible job too. Look at the Solyndra. And there's countless stories of those sort of things where the government's betting on this particular company.
Pat: But the mere fact that Nvidia turned around and said, "Oh, by the way, we're actually going to invest in Intel," just reeked of government coercion. It absolutely...
Scott: There's none of that in this administration, Pat. Are you kidding? We don't want to get political.
Pat: I like a lot of what he does, though. I hate to say it.
Scott: [crosstalk 00:44:38.374] Yeah, yeah.
Pat: Yeah. But some of the stuff that happens, you just shake your head.
Scott: This sort of stuff. Because I mean, I'm a free market...You know what's interesting. Really super quick. We had a tour of the Louvre in Paris.
Pat: Very nice. Oh, right on the river there. How fancy.
Scott: I had a two-week vacation. It's not like I'm in Europe all the time.
Pat: Would you buy a little Eiffel Tower from those guys that sell on the blankets?
Scott: No, I did not. I did not. But we had our tour guide, this little woman, we had a two-hour tour. By the way, it's the way to do it if you're gonna...because otherwise it's a zoo.
Pat: Oh, it's a zoo.
Scott: It was kind of a semi-private tour, she wasn't just...But she was from Albania originally. She had been there for...She was an art history teacher now. And she was a die-hard capitalist. She talked about meritocracy and stuff and her, like, favorite things she was showing talks about how working...Her art. And I said to her...at the end of the thing, I said, "Man, you are a die-hard capitalist, aren't you?" She says, "How could you tell?" And I think...
Pat: Okay, keep going. So what...?
Scott: That was my only point. Just she was an immigrant working her tail off...
Pat: And a die-hard capitalist. Which seems really weird for someone that's leading an art tour in the Louvre.
Scott: She was obviously doing it for the money. I don't think she was doing it for a hobby.
Pat: Got it.
Scott: Well, it's been great being here with you. We'll see you next week. This has been Scott Hanson of Pat McLean of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: Pat McLean.
Scott: Glad you are with us today as we're talking about financial matters. Myself and my co-host here, both long-term financial advisors and glad to be with you on this program that we've been doing for a long time as well.
Pat: Thirty years.
Scott: Yes. Long time, long time. Well...
Pat: Scott, what do you think?
Scott: These markets...
Pat: Market meltup? It feels like a meltup.
Scott: By the way, we're recording this on Tuesday the 23rd. I don't know what day it is. Whatever, something like that.
Pat: 23rd. Yeah.
Scott: 23rd. Look at me.
Pat: Excellent. Very good. It's crazy.
Scott: Well, it's funny. I was just on vacation for 2 weeks, which is a...I don't think I've taken 2 weeks since 25 years.
Pat: Well, you're an old man now, so this...
Scott: Two weeks is too long. Ten days was my max. I should have come home. Anyway, but...
Pat: Really? The last four days, were you just not pleasant to be with?
Scott: No, it's all right. When you start counting down the days until you have hotel rooms, then it's like...Anyway, I'm not complaining. I'm not complaining about it. My point is, while I'm gone, my wife was teasing me because she's like...You look at the markets and you're like, not because they're down, because they're up again. It felt like every day they were going up and up and up. And I think the reason...
Pat: Why? Do you have a reason behind this? I have a thesis.
Scott: What is your thesis?
Pat: I think it's driven by this kind of AI mania. This is different than the dot-com because it's got bleed-over into regular companies.
Scott: I mean, we see it firsthand in our own organization.
Pat: That's right.
Scott: The benefits of artificial intelligence.
Pat: Yes.
Scott: And some new technology. I don't know, there's no way you draw the line between AI...Everything's AI now. If it's a good technology platform, everything's AI. A great app, it's AI.
Pat: As I told my wife, she said, "Could you do the dishes?" I said, "No, AI's going to do it."
Scott: Well, the dishwasher does a lot of it. You've got to admit, right? And the fact that water comes up through, it just magically appears in my sink.
Pat: And it's clean and we can drink it is pretty amazing.
Scott: It is very amazing. You take it for granted. I mean, I think what makes me nervous about the markets, the prices of...particularly some of the handful of really large tech companies have gone up much faster than the profits have. And so the bet is that the profits are going to catch up. And even, frankly, with a lot of other companies, it's just...
Pat: The price-to-earnings ratio has gotten large.
Scott: Yes. So people are...
Pat: Relative to history.
Scott: Correct.
Pat: Especially in a high interest rate environment. I understand it in a low interest rate environment.
Scott: Yeah, because I think people kind of forget...In order to have a return on owning a company, whether it's a public-traded company or private company...
Pat: Whatever it is.
Scott: ...the market value of that is going to be based on two things. One is how much earnings that company has.
Pat: Today. Right now.
Scott: Yeah. How much earnings. And two, what kind of multiple or how many times of that earnings is someone willing to pay? So as an example, let's say you got a corner gas station that's earning you $100,000 a year.
Pat: How many years earnings would I pay for it?
Scott: Right. So a price-to-earnings multiple, let's say, would be...Let's say it's 25. That would mean that gas station would sell for $2.5 million to generate $100,000 [crosstalk 00:04:05.592].
Pat: Which means that I would take 25 years' worth of earnings to pay for it.
Scott: Yes. That's correct. That's about what the market is. A little more than that, the broad market. But here's what can happen. Let's say you go buy that corner gas station. You're excited about this. I'm getting $100,000 a year earnings on it. And let's say over the next decade, that doubles to $200,000 in earnings. But over that time, investor multiples, what an investor is willing to pay for a year of earnings, let's say it drops from 25 to 12.5.
Pat: Then nothing changed in my world.
Scott: The price of that gas station is the same 10 years down the road, even with twice as much earnings.
Pat: If I'm interested in resale...
Scott: If you're interested in resale.
Pat: ...versus just income.
Scott: Yeah, they go hand in hand. I mean, it's still...
Pat: Well, it does price.
Scott: It does price.
Pat: It does price.
Scott: I mean, I think that's what, when you look at the overall markets, the market is pricing in that AI is going to dramatically help companies in their efficiency, which means they can cost effectively grow without having to bring on a lot more labor or more expensive, and they can afford to pay for the technology.
Pat: It's going to float all boats.
Scott: That's what's being priced down.
Pat: And I believe that.
Scott: I do too.
Pat: I absolutely believe it. The question is, to what degree?
Scott: Yeah. And have we overbid? Are we up higher than what's realistic?
Pat: We don't know.
Scott: Are we still underbid? Who knows?
Pat: But my point being is that if I worry about AI at all, it's not the efficiencies that's going to come from it. It's the societal issues that...
Scott: Yeah. But it's interesting. I was just even this morning reading some headlines and one of why the economy is heading for stagnation. No, it was a completely negative one. Then I saw another one that was very bullish. Nobody knows.
Pat: No, we don't know either.
Scott: Nobody knows.
Pat: No one knows.
Scott: Which is why guys like us and gals like us, financial advisors, talk about, look, particularly as you get further along in life, it's about...typically you're more concerned about maintaining your standard of living than you are about increasing it. So if you've got enough extra that you can also bet like, hey, if things work out really well, I can increase my standard of living. Fine. But I think for a lot of people, approaching retirement age, let's make sure things are set up in a manner that give you the highest probability of success.
Pat: I'd rather not be poor than rich. Not be poor. People get confused. They think they want to be rich, but really what they want to be is not poor.
Scott: And what is rich? I mean, think about this, Pat. We have thousands of clients, right?
Pat: Yes.
Scott: The guy with the million says, "I'm not wealthy. That guy over there, he's got $2 million." The guy with $2 million saying, "I'm not wealthy. That guy over there, he's got $5 million." The guy with $5 million says, "What are you talking about? My neighbor's got $10 million."
Pat: Oh, my wealthiest client, if you met him, I mean, he screams poor every time I talk to him. I tell him, I said, "You're like a man with a ham under his arm crying hungry. You gotta stop."
Scott: He's not going to stop.
Pat: He's never going to stop, which is probably why he has a lot of money.
Scott: Anyway, it's an interesting time. I like when earnings grow faster than stock prices because it gives you opportunities to think this is a great buying opportunity. Right now, look...
Pat: The PE ratio...
Scott: ...the stock market can go way up further before there's any sort of correction. We have no idea when a correction is coming.
Pat: That's right.
Scott: It will come again. A bear market will come again. We just don't know when that's going to happen. Nobody does.
Pat: I think if we see a correction, Scott, it's going to be relatively short term because there's so much cash on the sidelines.
Scott: Almost $8 trillion in money markets right now.
Pat: That's right.
Scott: A record high. A lot of money in money markets.
Pat: That's right. That's right.
Scott: Interest rates, Fed just cut rates and the market's betting that they're going to continue to cut rates throughout the rest of the year.
Pat: Yeah. And so there's so much money in...so that there is a disruption of, let's say, 10% to 15% I think that cash will flow in. That's my opinion.
Scott: You might not be right.
Pat: Oh, that's correct. But I might be. Who knows?
Scott: But you don't want to have investment policies based upon your opinions.
Pat: Oh, correct.
Scott: Right? So I think right now, look, if you're sitting there thinking, wow, I can't believe how much my accounts have grown over the last couple of years, probably a good time to take a look at what your overall allocation is. Maybe it's time to pare back a bit. I mean, let's say a couple of years ago, you had 50% in equities, publicly-traded equities, the other 50% in other assets, today, you might be 60%, 65% in equities because the kind of growth we've had.
Pat: Correct.
Scott: Great opportunity to bring your allocation back to more in line with what you think is reasonable.
Pat: Well, do most people actually...I hope most people have some sort of an investment thesis and then stick to it, but I doubt it.
Scott: Well, you know that most people, I mean...
Pat: Yes.
Scott: Anyway, but I'd rather the markets go up than go down.
Pat: Yes. And so how was your vacation?
Scott: It's good. Back late last night.
Pat: Fourteen days.
Scott: Too long. I shouldn't be complaining about having it too long. And I'm playing with this [crosstalk 00:09:26.621].
Pat: I know. Are you giving me [crosstalk 00:09:28.779]? But you ran a marathon. Where?
Scott: Berlin Marathon on Sunday, two days ago as of this recording.
Pat: And is it the same distance in Berlin as it is in the U.S.?
Scott: 26.2 miles, a standard marathon. Yes, that is correct. You know, surprisingly...
Pat: But they call it kilometers there, do they not?
Scott: Forty-two kilometers, and a little bit more, which I wasn't aware of. I should have...
Pat: So it's not 26.2 miles.
Scott: Well, I don't know how many 42 kilometers is. I think it's 42 and some change. But I thought the Brandenburg Gate, this kind of historical gate, I thought that's where the finish was.
Pat: [crosstalk 00:10:05.610]
Scott: I gave it everything I had. I got there and I looked, and the finish was like a few more minutes ahead. It was hot, record heat, about 80 degrees, humid.
Pat: And you ran it with...?
Scott: They didn't have enough water for the Germans. It was very disorganized, I felt. I was actually quite surprised.
Pat: The Germans?
Scott: I was quite surprised how...
Pat: That the Germans were disorganized?
Scott: ...it was hard to find the start. There wasn't a lot of people guiding us.
Pat: And your daughter, Jessica, ran it with you?
Scott: She ran it as well.
Pat: Did she beat you?
Scott: No. No.
Pat: Really?
Scott: Well, she's an ultra marathoner, so she trains for slower, longer distances. So she just did this as a training run.
Pat: Oh, just for fun.
Scott: But a lot of people had struggles because it was so hot and there wasn't enough water. I got behind on fluids. I don't know why I do these things.
Pat: I got to tell you, I'm with you. I've just decided never to run a marathon.
Scott: I'm 59 and I'm still able to do 'em. [crosstalk 00:10:59.107] It's like, I'm grateful I can still move. I don't know.
Pat: All right. Let's do some calls. What do you say?
Scott: Yeah. And if you want to join our program, 833-99-WORTH is our phone number. You can call and schedule something or, maybe even an easier way, just send us an email at questions@moneymatters.com and we will set up a time to get you scheduled to be on the program here. Let's start off here in California with Zach. Zach, you're with Allworth's "Money Matters."
Zach: Thanks, guys. So I just started a new job and it's in the public sector. So now I'm with STRS and they also have, oh, sorry, 403(b) and 457. I have an old 401(k) and I just wanted to know, is there a preference and which one I should roll over to use? And if and when I roll it over, like if I want to do alone, is there a limitation on that?
Scott: And so right now, it's a 401(k) not a 403(b). Is that right?
Zach: Correct.
Scott: Okay. All right.
Pat: And for the rest of the listeners, STRS is the State Teachers' Retirement System in the State of California.
Scott: And it's crazy how many different retirement plans. Right? It sounds insane.
Pat: It makes no sense.
Scott: 401(k), 403(b)...they're all relatively similar.
Pat: Similar rules, but not identical.
Scott: Slight nuance in some of the differences. But the fact that we have all these different things...
Pat: Kind of crazy.
Scott: And how old are you, Zach?
Zach: Forty-seven.
Scott: So in a 401(k), now that you've left your employer, you cannot take a loan on it. And if you roll it into an IRA, you cannot take a loan on it. If you roll it into your 403(b), you can take a loan on it.
Pat: Up to $50,000 or half the account balance.
Scott: Why would you want to take a loan on it?
Zach: Oh, I just want to know that, like, nuances and all that stuff.
Scott: So here's the difference between the two is a 457 is much more liquid at severance of employment than a 403(b).
Pat: Because it doesn't matter your age. When you separate service, money in 457 can be accessed without any early withdrawal penalties. You don't have to be 59 and a half. You can be 47 or 52.
Scott: But not all 457s accept 401(k) rollovers, but a public entity 457 normally accepts a rollover.
Pat: But a 457...Here's one difference between the 401(k) and a 457. A 401(k), it is a payroll deduction...I was going to call it a scheme, but [crosstalk 00:13:47.679].
Scott: [crosstalk 00:13:48.439] in Europe.
Pat: System, program where you take a portion of your paycheck and you say, I'm going to have these dollars allocated into this account that's set up in a separate trust. It's not the company's assets. It's protected from the company's creditors. On a 457, it's based upon the employer. So it's technically a deferred payroll. So the company...basically your employer says, "Instead of paying you 100% of your pay today, I'm going to pay you 90%. The other 10% I'm going to set aside. Oh, by the way, I'm going to let you decide how it's invested." But it's still technically subject to creditors. So if it's some tiny, bodunk municipality, we'd probably say avoid the 457.
Scott: But in your case, I'd just move it to the 403(b). I mean, if you were my little brother, I would just say, yeah, just move it to the 403(b).
Pat: Assuming you've got a good 403(b) that's not a high cost one, because some of these are old annuities.
Scott: But he's at STRS. So I assume you work in a school.
Zach: Yes.
Scott: OK. And so the menu of the 403(b)s is pretty wide. So my my daughter was a member of STRS. So we picked a really low, low cost.
Pat: Yeah, there's low-cost options.
Scott: Yeah. But but there are people that come to your lunch room, they bring in pizzas. Do you ever see these people?
Zach: I'm too new to see that happen.
Pat: They still do that?
Scott: Yes. I asked my daughter.
Pat: They still come in?
Scott: Yeah, they still come in.
Pat: And try to sell you...
Scott: Yeah, and try to sell you...
Pat: It's a weird structure.
Scott: 403(b), yeah. But you have a big menu of choices there and just rolled into that and you can take a loan against it, it's easy.
Pat: Did that help?
Zach: Yes. So one last question, if you don't mind. I also noticed that I'm no longer paying into Social Security. So with my service in a private sector, when I retire, I can still collect Social Security, correct?
Pat: Go fish.
Scott: You can as of now.
Pat: Yeah. Because they just...
Scott: The Windfall Elimination [crosstalk 00:16:04.951]...
Pat: Was just eliminated.
Scott: The WEP.
Pat: So it used to be that if you paid into both, you could collect Social Security, but it would be offset based upon the pension you were receiving during those years that you did not pay into Social Security. But that was just eliminated in the One Big Beautiful Bill.
Scott: Two months ago, three months ago.
Pat: And I don't know when that kicked in, immediately or it kicks in for 2026?
Scott: I don't know when it kicks in.
Pat: Although, I was visiting with a friend and his wife was a retired schoolteacher. She was lamenting how she couldn't collect Social Security. And I said to her, "Who's your financial advisor?" And she said, "Well, this guy." And I said, "Well, he's not doing...he should have told you."
Scott: So, yes, you can collect both.
Pat: Well, I would not plan on it in your situation. I mean, look, by the time you go to collect Social Security, the Social Security Trust Fund will be bankrupt. There won't be...
Zach: I understand that.
Scott: Okay, so why don't you plan on not...There's a good chance that that Windfall Elimination Provision comes back at some point in time.
Pat: I think so. They gotta find some ways to reduce benefits.
Scott: Anyway. Yeah.
Pat: All right. I have a question for you. Are you a schoolteacher?
Scott: I got a question for you.
Zach: Sorry, say that again.
Pat: Are you a schoolteacher?
Zach: Yes, I am.
Pat: Were you a schoolteacher previously?
Zach: I was, but in the private sector.
Pat: Oh, you were.
Zach: It was not a public school. Yeah.
Pat: Very nice. And what grade?
Zach: College level.
Pat: And what grade are you going to be teaching now?
Zach: Same, college level.
Pat: Oh, got it, got it. Okay, very nice.
Scott: Well, good. Well, thank you.
Pat: Wait, wait, one more. What subject?
Zach: What's the term they're using it for nowadays? Career technical education.
Pat: Okay. All right. Well, thank you for serving.
Scott: Yeah. I don't know what that means.
Pat: It helps people get jobs.
Scott: That's what it sounds like. It sounds pretty important.
Pat: Yes. Yes. Yes. Some might actually be able to get a job after your.
Scott: But Pat, with these...
Pat: Follow your dreams, Scott.
Scott: Look, the further someone is away from retirement, from planning standpoint, the more you got to look at what government benefits are going to be there for you?
Pat: What probability of these promises are going to be there?
Scott: Because even if you look at Medicare, right? So right now, if you're a high-income retiree, your Medicare Part B premiums could be several hundred dollars a month versus if you have a more modest income, which is a hundred bucks a month.
Pat: Yeah, or close to zero.
Scott: Or close to...yeah, depending. So it's one way of taking away benefits, right? If they're going to charge you more...
Pat: It's needs based.
Scott: That's how Medicare is today. And you kind of wonder, if you look down the road...
Pat: Will it be $3,000 a month, $5,000 a month? I mean, what will it be?
Scott: The cost of medical care, it's phenomenal. It's staggering. Look at the percentage...
Pat: Twenty percent of our GDP in the United States. Twenty percent.
Scott: Yeah. But we have great...
Pat: And if you look at most of the jobs that have been created recently, they've been in the medical sector. But look at our...
Scott: Oh, I know, pat. I'll never forget, years ago I had a client who's retired and he comes in and he's talking about his knee replacement, how awesome it is. He's able to golf again. He says how much pain he used to be in it. "It's so good. I'm golfing three days a week. I haven't been able to do this." And then 10 minutes later, he's complaining about his his medical premiums. He was retired, had medical care. Relatively young retiree, had medical care from his employer and his co-payment went up, whatever it was.
Pat: Yeah, and the knee...
Scott: Not even very much. There was a complete disconnect. But I said, "You got a brand new knee."
Pat: And what's he say?
Scott: "Well, I guess you got a good point there."
Pat: But like a knee is a lifestyle. He wasn't going to die from a sore knee. He would just be uncomfortable and couldn't play golf.
Scott: Well, to some people, that would equate to death. I'm not a golfer, but I do know some of those guys. You know 'em too.
Pat: I do.
Scott: Yeah. All right. Let's continue on with our calls here. We're talking with Ken. Ken, you're with Allworth's "Money Matters."
Ken: Hey, good morning, Scott and Pat. I feel very honored to talk to you guys. I've been listening for 30 years.
Scott: Oh, wow.
Ken: I'm stationed here and happy to have a chance to chat with you. I got two questions about the so-called safe withdrawal rates within retirement accounts. And I know I guess this Bergen study had kind of targeted about 4%. And then listening to y'all, it sounds like you kind of work with about 4%. And I read recently that he had modified that and he was saying now about 4.7%. So my first question is, what do y'all think about that and what number do you use? And you want the second question now or...?
Scott: No, let's talk about that. Yeah. So the 4% rule, essentially, here's the premise behind that. You go into retirement, you take 4% of your portfolio out as an income, and then you ratchet that up each year with inflation. Right? And the theory is if you go look at all the economic cycles, it gives you about a 95% chance of success rate.
Pat: And when you say portfolio, what's the stock-to-bond mix on that, Scott?
Scott: On the 4%? I don't know what it is.
Pat: I think it's 60-40 or 70-30, somewhere around there.
Scott: It's probably 60-40, somewhere there. So I think it's a good rule of thumb. I think for somebody saving for retirement, if they can get and say, man, 4% of my portfolio, it's going to work out plenty of income from retirement. I think that's a fantastic place to be. Here's what...
Pat: It's a good place to start.
Scott: Correct. Correct. It really is. And if you can get there, I think you've got a very high probability of success in retirement of not having to go backwards on your income. But the reality is this. When we go through these downturns, people tend to spend less, even those that have the assets. So if I go back, like the financial crisis, I can remember having conversations with clients, people who had done extremely well, saved a lot, could afford to do whatever they wanted to do, and they would say things like, "I just feel a little funny about going on this two-week cruise when my my good friend is laid off right now," or things are tight because...And so even people with means tend to cut back some of their expenditures during times like that. And the 4% rule completely ignores that. It ignores any sort of what's happening in your life, what happens as other things occur, such as illnesses within the family and bum knees you can't travel on.
Pat: It ignores actually people. I remember I had a client, he was crazy, just crazy. It was awesome. I really enjoyed him. But he wanted to take 8%. I said, "You're going to run out of money." He said, "There's no way, Pat." He said, "I'm going to die in the next 10 years." And he was right. He was 100% right. He told me, he said, "I live hard and there's no way I'm going to make it." And I said, "Well, you will run out of money." And he said, "I will be long dead before I run out of money." And he died like seven years later. So...
Scott: I think it's a good starting place. Yeah, absolutely. But there's other factors that come in. I mean, sometimes people have a house that's going to be repaid off within seven years of retirement, or there's other factors going on. So I think years ago, before there was sophisticated software, probably a good rule of thumb, and it's a good rule of thumb in your planning, but there's much more robust systems today that can look at your exact situation.
Pat: Even the financial planning software has problems in it because it ignores series of return sequence events.
Scott: Yeah, but you can plug some of those things in and give you some sort of...But it's still based on assumptions.
Pat: That's right.
Scott: And then humans are the ones that come up with the assumptions. And based on my experience in the financial markets, humans can talk themselves into whatever assumptions they want to make the model work, whether it's retirement or buying companies or whatever it might be.
Pat: Do you think?
Scott: I mean, look at the financial crisis, right? The brightest minds on Wall Street all had these models.
Pat: Yes. It's never...
Scott: All based on assumptions. Faulty assumptions, it turned out.
Pat: Yes. That they made up and then relied on, and then went to boards of directors and actually sold.
Scott: Okay, second...Does that answer your question?
Ken: Yeah, it sure does. Yeah, it is a rule of thumb and you kind of work from there.
Pat: I would be...like if you came into my office and we looked at your financial plan and you said, "I'm going to take out a 4% distribution and adjust it for inflation," and you had a 60-40 portfolio, I would say absolutely.
Ken: Okay. And that kind of leads to my second question, as you mentioned, is this idea of adjusting that rate for inflation. Because it seems to me that there are two things going on as we go through time. One is theoretically the value of your assets is going down because you're drawing, but also they are responding to it and it may be increasing.
Pat: Can we stop for a second there?
Ken: Absolutely.
Pat: When you said the value of your assets are going down, the 4% rule is designed so that you value go up.
Ken: Yeah, okay, got it.
Pat: Right? In fact, the concept of spend down, unless you know your dying day, you really don't want to spend down.
Scott: Oh, my gosh. First of all, emotionally, it is a terrible thing to watch.
Ken: Oh, yeah.
Scott: I mean, just psychologically.
Pat: Well, that's again where the 4% rule doesn't...like, when your account values are shrinking, you might thinking, maybe we'll just cook in tonight, honey, instead of...or, I don't want to see the wine list tonight. You know what I mean? You just think about things differently.
Ken: Okay, well, then if that's not happening, that assumption is basically that you're going to effectively die with the same number that you started with.
Scott: That's correct.
Ken: Then it might be going up with inflation. You might actually be outperforming your 4% withdrawal.
Scott: On a nominal basis, yes. So the the dollar amount, the purchasing power might not be the same, but the dollar amount should continue to increase.
Pat: But your behavior in retirement...the effects of inflation is much different for a retired person than it is for someone that's raising four kids, if in fact that exists anymore. Your spending is so much different, right?
Ken: Yeah. So it sounds like you all are comfortable with roughly this 4% start and with this idea of looking at inflation and doing, like, an annual adjustment on the rate of your withdrawal.
Scott: That's that's correct. That's correct.
Pat: And with that sort of formula, it's impossible to run out of money because it's based upon taking a percentage of your portfolio.
Scott: Not a dollar amount.
Pat: Right. But Scott, so he comes in with a million dollars. You start a 4% distribution. Right? So we're doing...
Scott: Let's say it's all in stocks. There's a horrible bear market. And it falls to $500,000, 4%, now you just cut your...you're taking out half as much as you were before.
Pat: Yeah. But typically you don't cut it in half, but you cut it some.
Scott: You mean realistically what humans do.
Pat: That's correct.
Scott: That's right. You see your million dollars in retirement fall to $500,000, my guess is you're changing your spending a little bit.
Pat: That's right. That's right. That's right. So I guess
Ken: That sounds good.
Pat: We just said we completely agree with the 4% rule except for all these other reasons.
Scott: I mean, look, no one likes downturns in the market. Right? Recessions, they're brutal. And no one likes seeing their portfolio decline. But we're going to have periods like that in the future. And no one likes adjusting their spending. But it's not that hard to adjust your spending when everyone else around you is having to adjust their spending. Doesn't feel as painful. It feels prudent. It feels like you're doing something to have some control over things that you have no control over, the markets.
Pat: Yes.
Scott: That's one thing you can control in retirement is your spending.
Pat: That help?
Ken: Correct.
Scott: Are you retired now?
Ken: Yes, absolutely. Yeah.
Scott: Are you taking 4% out?
Pat: Twelve.
Ken: A little less than that.
Pat: Oh, you're good.
Ken: [crosstalk 00:29:18.505] saying this, I was thinking, well, you know, maybe live a little larger or make sure. And when I saw that that's rule of thumb, and I've been told a rule of thumb is a great way to lose your fingers. That the rule of thumb was [crosstalk 00:29:32.698].
Pat: How old are you, Ken?
Ken: I am 68.
Pat: So the reality is even if you're in great health, even in your great health, your ability to spend money is between the ages of today and typically 78, 79 if you're in great health. I only have a few clients that travel in their 80s. So if you're traveling now, I would encourage you to...
Scott: Very rare in your 80s.
Pat: Very, very rare.
Scott: Maybe there's cruises. Cruises are a little more common.
Pat: Yes.
Scott: But as your health starts to deteriorate, it's not that easy getting on a plane and moving around, or getting in the RV, or going to visit the relatives. And so I will actually encourage clients to actually spend more money in their 60s and 70s.
Scott: Or if you have like these are three or four things I'd like to do in my lifetime, maybe it is carved...How much will that cost? And you carve that out the rest of your portfolio and you give yourself permission to spend that in the next decade on those three or four things or whatever the number is.
Ken: That's a good structure. Yeah, I like that.
Scott: It is a good structure because then it's like, okay, that's what these dollars are for, because it's this weird balance. This past weekend, I don't know if you saw this, Pat. Jonathan Clements died and Jonathan Clements...
Pat: I didn't see that.
Scott: I'm sorry. Yep.
Pat: Oh, that's awful. He was a young man, wasn't he?
Scott: Sixty-two.
Pat: Anyway, let's finish up this call.
Scott: Well, it's germane to this.
Pat: Okay, okay.
Scott: And Jonathan Clements was a personal finance writer for "The Wall Street Journal" ever since I could remember. And then he must have got squeezed out during some cutbacks from the paper.
Pat: He was great.
Scott: And then but he's still been writing "The Humble Dollar" that I subscribed to his newsletter. He'd been doing it for years and he came down with some sort of terminal cancer year, year and a half ago. And he wrote about that.
Pat: I remember reading about that.
Scott: But what I think...and the reason I'm bringing him up, because he was big on preparing for...He wrote for individuals, right? For families, individuals, here's how to save for retirement. He wrote about things like the 4% rule, paying yourself first, all these basics to make sure that you've got enough money in retirement age, the later part in life, so you're not dependent upon your own labor to produce income for your lifestyle. Right?
Pat: That's what retirement savings is.
Scott: Then he dies at 62.
Pat: Did he write about...? I didn't read that much of his stuff, but...
Scott: And I thought, it's a shame. Here's someone who really helps people prepare for their future economically, financially so that they have some freedoms the latter part of the life, and he's taken out at a relatively young age. And it just reminded me of that kind of balance. And those that tend to be the best savers are the ones that have the most trouble spending in retirement. And you can't take any of these things with you. You can't take a dollar with you.
Pat: Yes.
Scott: It all gets left to somebody.
Pat: And your kids will spend it.
Scott: Differently than you do.
Pat: Most likely, yeah. So anyway, it's a balance. It is a balance. But 4%, 5%, you're 68. Yeah, have at it.
Scott: Appreciate the call, Ken. And yeah...
Pat: I didn't see that he died.
Scott: Yeah, I got a text from somebody last night. I guess...I don't know when he passed away. But yeah, it's a shame, but it was also I just thought one of those, huh.
Pat: But at the same time, you...
Scott: [crosstalk 00:33:07.925] I know.
Pat: Oh, and I have a...I'm 62. I turn 63 in a couple months. I have a hard time spending money at points in time. I mean, you've known me for 35 years. I can be really, really cheap, like really, really cheap.
Scott: I think part of it is it's a way to feel like you still have some...Because I'm the same way. Unless there's a huge line at Costco, I get my gas at Costco. And my friend was laughing at me. I said, it's really not going to have any difference in my life and my standard of living.
Pat: You feel good about it, though.
Scott: But I feel good about it. I feel like I'm doing something responsible to save the few dollars I have. I don't know.
Pat: I get gas at Costco 85% of the time.
Scott: I mean, because part of it, I drive by it all the time. If I didn't drive by it, I would probably do something different. But yeah, to your point, I think it gives you a sense of some sort of control over things.
Pat: And look, I remember when I had...I remember when you were living in that fireman's bedroom.
Scott: Yeah, very small bedroom I rented when I moved to Sacramento. I moved to Sacramento in 1990, Pat. I'm sorry, 1991. Pat and I met, we worked at the same company together. I was in the Bay Area and I transferred up in January of 1991. I had no money.
Pat: You had a Rabbit. Was it a Rabbit?
Scott: The Jetta. The engine fell out.
Pat: Sorry.
Scott: Literally.
Pat: I called it a Rabbit and, in fact, it was a Jetta.
Scott: The engine fell out. Well, when that happens...
Pat: It's not funny when it happens.
Scott: When that happens, the car comes to an immediate stop, by the way.
Pat: So you we driving it.
Scott: Yeah, I was pulling into 7-Eleven something like that. [crosstalk 00:34:53.656] a complete stop.
Pat: You get out and then did you see the engine on the ground?
Scott: There's something about the motor mounts that you're supposed to pay attention to.
Pat: Wait, wait. Truly, did the motor...?
Scott: That is correct.
Pat: It touched the ground?
Scott: Well, it was on the ground, yes. The motor fell out. I wasn't exaggerating.
Pat: Did it rip out the oil pan? Was it leaking oil?
Scott: No, no. It was a quick stop. Abrupt stop. Oh, yeah. I moved to town January of 1991. I rented a bedroom from some stranger because I couldn't afford my own rent.
Pat: This is a long life story.
Scott: It's a short life story.
Pat: But I asked. I did ask.
Scott: But there's some of these things that stick with you, right?
Pat: Yes.
Scott: Like spending.
Pat: You can't change that.
Scott: It was $300 a month, my rent. And I remember I had a couple months I did not have the $300. I took a cash advance from my credit card. I'm a financial advisor, full disclosure. When you're trying to start something, right? I could have went and got a job at Pepsi. They would have given me a company car and all that. I could have had a sales job at Pepsi. But I thought I could make it as a financial advisor. I'm going to...
Pat: Did you have a job offer for Pepsi? Where did that come from? Where did the Pepsi thing come from?
Scott: That's what my mom would tell me.
Pat: Jealous? Getting a job at Pepsi.
Scott: I don't know if it was Pepsi.
Pat: Go sell some sugar water.
Scott: "Billy has a job with Pepsi and he gets a nice wage and a company car. Why don't you go work for Pepsi? You can get a company car and a nice wage." I don't know if it was Pepsi. Whatever.
Pat: No, I get it. My first job out of college, I had a company car.
Scott: Yeah, you had one of those jobs. It wasn't Pepsi. It was something different. So my point...So I remember those times and I remember, like, who's got the lunch special that day. If I didn't bring my lunch, which I brought my lunch off. But if there wasn't one, like the Mongolian Grill had a special on Tuesdays or whatever it was. I had to make it work.
Pat: And that stays with you.
Scott: Some of those things stay with you.
Pat: And in retirement...So we see people that move into retirement that are great savers. And oftentimes they have the hardest time...in retirement is changing that behavior. It is a really difficult thing to go from saving to spending.
Scott: You spent your whole life stacking wood on the wood pile. And suddenly you're going out and pulling it out.
Pat: It's very difficult. I have a client, a family. He retired, owned his own business. And he, in the last three years, would start giving money to his kids. And he always said to me, "Better than from a warm heart than a cold hand." And he gave it to them...He said, "They're going to get it anyway." So he started giving it away.
Scott: Was he older or had ample assets?
Pat: He was older. He was in his mid 70s and ample assets. But he died eight weeks ago. Just he dropped out at dinner one night. And that just sticks with me. Just this, "Better from a warm heart than a cold hand. "Yeah. He said, "You know, I'm never going to spend it, and and they will. And it will improve their life and I get to see it."
Scott: You know, I'll be very transparent here. One of the challenging things about being a financial advisor, you want to have these conversations with people, but there are times that they could take offense to it. And I'll never forget. I've been an advisor...I think I was able to afford rent at this point. Maybe I had a house.
Pat: You were a hitter.
Scott: I had a little financial stability in my own life.
Pat: Was it last year?
Scott: But talking this couple, they had, I don't know, it was close to a million bucks in their 401(k). This was 25 years ago, 30 years ago.
Pat: So a million dollars is a lot of money.
Scott: Yeah, it's the equivalent of about two today. Right?
Pat: Yeah, two or two and a half.
Scott: And they weren't spending a dime of it. They were taking their required minimum distribution.
Pat: So they're retired.
Scott: Retired. They lived on Social Security. That's the only money they spent. They took the required minimum distribution, sent them out to the tax man, and had the rest go in another account to be invested. And so I would talk to him about it like, "Hey, why aren't you spend in some of these dollars?" and have these conversations. And came in for the review and...Let's call him Bill. Bill comes in by himself and I said, "Where is Susie?" And he says, "Well, that's what I wanted to talk to you about." I said, "What?" He says, "Well, Susie didn't want to come in because she feels like every time she comes in and sees you, you call her cheapskate." And I never called her cheapskate. I was trying to help them, like...
Pat: Consume the money?
Scott: ...do something with these dollars, to actually use them...
Pat: Not to save them.
Scott: ...whether it's to their own good, whether it's to charity, whether it's to their kids. But like, but to your point, this client of yours said I'd rather give my kids some money now with a warm hand...
Pat: Yeah, warm heart...
Scott: Warm heart than a cold hand.
Pat: Warm heart than a cold hand. Yeah.
Scott: But I remember after that thinking, I need to be careful as an advisor being too direct with people.
Pat: Yeah. Right. And did it haunt you for days? It would haunt me.
Scott: It still haunts me today. I'm still...because I look at it and you think, I meant no offense, because I know when I'm offensive.
Pat: I've not seen that side of you.
Scott: Obviously, I still think about it. I could picture him walking into my office...
Pat: But that behavior did not change.
Scott: Their behavior did not change. My behavior changed a little.
Pat: On how you actually explained it to clients or how you didn't explain it?
Scott: Both.
Pat: Did you shy away from it...
Scott: Absolutely.
Pat: ...because of that interaction?
Scott: Absolutely.
Pat: Well, that makes sense. Look, people, whatever makes them happy, right? Maybe not spending the money...
Scott: Maybe that's what they really enjoyed.
Pat: Maybe not spending it.
Scott: Who am I to judge?
Pat: Yeah. Maybe the suffering was the point of...well, I don't call it suffering, but maybe the whole act of actually saving for the future was the point of it. Not actually spending it.
Scott: Well, clearly for them. And look, I mean, my own my mother still saves. She's 86 years old.
Pat: You should encourage that behavior.
Scott: She's 86. She still likes to set money aside. I think they still have a jar where they put coins in.
Pat: Good for her. Is she happy?
Scott: She enjoys that. To her, it gives her some satisfaction. I don't think she's taking the butter cubes at the restaurant on our way out.
Pat: Not yet.
Scott: I don't know. It's just I find the whole behavioral finance...I guess we started off with...we were talking about the 4% rule and it's all morphed into this. But it's the balancing of we're all humans. And for most people, dying with the largest amount of money is not the objective. Right? We save for the future in large part because we're uncertain. We're not sure that we're going to have a paycheck coming in forever. And we want to be in a position in life, most of us, where we're not obligated to work. It's an option that we have. If we want to continue to work in our later years, we can. But we want to be in a position that we've got the economic freedom to say, I don't want to work, or I do want to work, or I want to travel, or I don't want to travel, or I want to watch my 401(k) grow while I just live on Social Security, or I don't, I want to spend my...I mean, having some flexibility and getting to that point in life, I think it's important to...
Pat: Oh, yeah. Unfortunately...well, this is a very first-world problem, number one. It's very first-world problem. And the number of, the percentage of the population that actually gets to that point is really, really small.
Scott: That is correct. The majority of retirees...still this day, the majority of retirees rely upon Social Security for the majority of their retirement income. If you're retired and you think about what your Social Security check is, think of that as the majority of your income. That is the majority of American retirees.
Pat: Yes.
Scott: The average American household doesn't have two nickels to rub together.
Pat: Well, actually, the average American government doesn't have two nickels to rub together.
Scott: Well, they act like they do. They're investing in companies now.
Pat: Well, we'll get to that. Let's...
Scott: About to bail out Argentina.
Pat: This Intel thing, now Nvidia is investing in Intel. They said they were gonna commit $5 billion. And this is exactly what we talked about when the U.S. government...
Scott: I don't like it at all, the government picking [crosstalk 00:43:59.224].
Pat: It's awful. Well, they've done it for years.
Scott: I never liked that either.
Pat: But they had liquidity events. They could have a liquidity...
Scott: But they've done a horrible job too. Look at the Solyndra. And there's countless stories of those sort of things where the government's betting on this particular company.
Pat: But the mere fact that Nvidia turned around and said, "Oh, by the way, we're actually going to invest in Intel," just reeked of government coercion. It absolutely...
Scott: There's none of that in this administration, Pat. Are you kidding? We don't want to get political.
Pat: I like a lot of what he does, though. I hate to say it.
Scott: [crosstalk 00:44:38.374] Yeah, yeah.
Pat: Yeah. But some of the stuff that happens, you just shake your head.
Scott: This sort of stuff. Because I mean, I'm a free market...You know what's interesting. Really super quick. We had a tour of the Louvre in Paris.
Pat: Very nice. Oh, right on the river there. How fancy.
Scott: I had a two-week vacation. It's not like I'm in Europe all the time.
Pat: Would you buy a little Eiffel Tower from those guys that sell on the blankets?
Scott: No, I did not. I did not. But we had our tour guide, this little woman, we had a two-hour tour. By the way, it's the way to do it if you're gonna...because otherwise it's a zoo.
Pat: Oh, it's a zoo.
Scott: It was kind of a semi-private tour, she wasn't just...But she was from Albania originally. She had been there for...She was an art history teacher now. And she was a die-hard capitalist. She talked about meritocracy and stuff and her, like, favorite things she was showing talks about how working...Her art. And I said to her...at the end of the thing, I said, "Man, you are a die-hard capitalist, aren't you?" She says, "How could you tell?" And I think...
Pat: Okay, keep going. So what...?
Scott: That was my only point. Just she was an immigrant working her tail off...
Pat: And a die-hard capitalist. Which seems really weird for someone that's leading an art tour in the Louvre.
Scott: She was obviously doing it for the money. I don't think she was doing it for a hobby.
Pat: Got it.
Scott: Well, it's been great being here with you. We'll see you next week. This has been Scott Hanson of Pat McLean of Allworth's "Money Matters."
Man: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.