September 3, 2022
- The Fed’s aggressive stance on lowering inflation. 00:18
- I’m selling my home. How can I minimize capital gains taxes? 13:42
- I want to retire in 3 years. How should I allocate my savings? 20:17
- When should I take Social Security? 27:28
- What should I do with $400,000 I’ll have in cash? 36:50
- Should I tap home equity to fund retirement? 47:10
Navigating market volatility, minimizing capital gains taxes, allocating investments, and whether to tap home equity.
On this week’s Money Matters, Scott and Pat discuss the Federal Reserve’s aggressive stance on fighting inflation. You’ll hear them help a man who wants to minimize capital gains taxes from the sale of a home. A 57-year old public school teacher wants to retire in three years but needs help with her asset allocation. Plus, guidance for a Texas woman with $400,000 sitting in cash, and advice for a man who wants to tap home equity to fund retirement.
Join Money Matters: Get your most pressing financial questions answered by Allworth's CEOs Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at firstname.lastname@example.org.
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Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's "Money Matters." Scott Hanson.
Pat: And Pat McClain. Thanks for joining us.
Scott: That's right, on this Labor Day weekend.
Pat: Little choppy markets again. Again.
Scott: It went what? Down 1,000 points earlier in that one day?
Scott: It's funny. As the markets... It's not funny. As the markets get...as they go higher, the points swings are a lot more. The Dow one originally started was at, what, 100? It was 11 railroad stocks.
Pat: Yeah. There was...
Scott: Nine railroads and a couple of others. Something like that.
Pat: Yeah. It was very small. It wasn't the Dow 30, it was, like, the Dow 13 or 11. [crosstalk 00:01:17] Somewhere in there.
Scott: Somewhere in there. And the index was at 100 when it first came out.
Scott: And now we're at 30-some-odd-thousand. So, [crosstalk 00:01:25]
Pat: The points swings were big.
Scott: A hundred points swing back when it was originally created would've been zero.
Pat: Would wipe out the market.
Scott: There would've been nothing.
Pat: Yeah. Everything is percentages.
Scott: Yeah. And it's interesting because I had a call this week with a company. They manufacture...they do these structured products. And I had a call only because someone in the industry says, "Hey, can you..." And the person who introduced me thought we would have no interest in the products that they were producing.
Pat: Explain the structured product for our listeners.
Scott: I had trouble understanding... So, here's one of the products they had. Okay. So, they're sold from the big brokerage firms, commissionable products. The firms manufacture them. They get sold as a commission. This company happened to make a product that's designed for fee-based independent advisors. Okay. Like what? Who? Pat and myself are, Allworth our company, that's what we are, independent. And they're trying to figure out how to get some traction amongst independent advisors. And I guess they have had some success for those advisors who left the big brokerage firms and started their own because they still have kind of that...
Pat: Product mentality.
Scott: ...brokerage mind. Product mentality. So, the conversation I had, it was very much product-focused, gives you something to talk to your clients about. And, like, one of the products they had, it was either a two or three-year term, you decide, and it is invested... Your returns can be based upon the S&P 500. Think of them, like, equity-indexed annuities, but it has a 9% dividend yield. It's a patient 9% yield and has a two or three-year period on it.
Pat: At what cost?
Scott: Well, who...
Pat: Where's the 9% coming from?
Scott: Well, I said to them, so I said, "I view equity investing as long-term money. These are dollars you don't need for five-plus years if you need them before that period of time, don't invest in the...don't own companies. Own something else that's not gonna be so volatile." I said this product, it's a three...let's assume we do a three-year term on this, we're taking a 9% dividend. The market is gonna have to do 9%+ for my principal to be intact in three years. And there's a very high probability that over a three-year period of time it does not return 9%. And now, I'm negative on my principal at the end of it.
Pat: Oh, they didn't talk about... There's no principle protection. It just yields 9%.
Scott: Not at 9%. That's correct. That was one of the products. So, they were coming at me at multiple angles. Like how would this fit this into the portfolio? And then they had other ones when there was like a guarantee you didn't participate in the dividend. Just...
Pat: But look, first of all, when you invest, it's return of principal and then it's return on principal.
Scott: They have these products that it protects you for the first 20% decline in the market. So, what happens when the markets go further? Well, then you participate in those losses.
Pat: But that all have a cost. They're just using...
Scott: Of course, that's what...
Pat: ...some derivatives around the products there.
Scott: Of course, that's what I said. They made no progress whatsoever with me. And I was very open and transparent on my worldview on things. And the person who set up the call said, "I had a feeling that this is how the call was gonna go." I think they're pretty much, like, telling these people, like, you're barking up the wrong tree if you think you're gonna go to independent advisors and try to have them sell these...
Pat: Because of the mentality around investing is... Look, the proper investment is for the time period and your risk tolerance. That's how investing works.
Scott: Yeah. And when you need the money. That's right.
Pat: So, these market gyrations that we're going through are 100% normal.
Pat: Hundred percent normal, right?
Scott: They're not fun.
Pat: Oh, they're miserable. They are absolutely miserable. That is the cost of return over the long period of time. That is why, over a long period of time, you will earn more than you earn in a one-year treasury or a bank CD.
Scott: And anytime you try to find some magic product that's somehow going to give you the upside without the downside...
Pat: There's a cost.
Scott: There's no such thing as a free lunch.
Pat: There's a cost.
Scott: And if there's a cost, then is that the cost you wanna pay, or is there some other...because they take a portion of those dollars and...
Pat: A hundred percent.
Scott: ...they put it in a bunch of bonds.
Pat: Or they do a derivative or they do options on the market to give you some downside protection. You look at your statement... First of all, if you look at your account every day, you gotta kind of rethink, you know, how you're viewing your world and your investments. And when you look at it, just realize you're not gonna spend that money. If it's retirement money, you've got long periods of time that you are invested for, and it's what it is.
Scott: Yeah. And maybe also it's good for you to have an understanding of, let's say you've got $1 million in your retirement account, what percentage is actually tied to the stock market? What percentage is available if I need cash today or tomorrow? What percentage is stable? And then you're like...you can go back and look at history. All right, other periods of time, how long has it been since the markets recovered to get back to new highs? They've always recovered.
Pat: So, the markets are up 70% of the time, historically.
Scott: That's right.
Pat: And down 30% of the time.
Scott: And it's no fun when they're down. So, anyway, we asked Andy Stout to join us. Andy Stout is our chief investment officer. And, Andy, we thought we'd have you join us just for a few moments today to talk about a little bit what the Feds did this last week. They always have that fancy shindig at the Jackson Hole.
Pat: Oh, I know. That was so hard to watch.
Scott: Like where they are?
Scott: I tell you, I've had lunch at one of those hotels once, and I know it's such...
Pat: Oh, in Jackson Hole, Wyoming?
Pat: Oh, beautiful.
Scott: Yeah. They're all five-star resorts there.
Pat: Oh, beautiful. I was up there a couple of years ago with my family, and Jerome Powell talking and these other rich people looking at the Grand Tetons and I'm like, "Not the..."
Scott: Where home prices are $10 million-plus, right?
Pat: Not the image. So, Andy, as we talk about geography and the beautiful city of Jackson Hole, can you talk a little bit about what transpired there and why the market reaction seemed to be, in my mind, a little bit overblown?
Andy: Well, if you look at what the Fed did following their July meeting and what Chair Powell said there, but not in the illustrious Jackson Hole. But when they came out of their Fed meeting in July, the markets interpreted what he was doing as somewhat of a pivot away from hiking rates as quickly as what they had been on pace for. They thought the Fed might be slowing down. Now, what Chair Powell did last Friday...
Scott: So, we saw...so that's the...
Scott: To that, you think that the markets started to increase, because the markets went up quite a bit over that period of time...
Pat: Because of how...
Scott: His comments.
Pat: He commented that he thought it was gonna slow? That they were gonna slow this?
Andy: Well, he just made some comments about basically that the inflation with where it's at, monetary policy in terms of the path for the interest rate hikes, it might not need to last at this pace forever, or for a... They see the end kind of in sight was the interpretation. And Chair Powell cleared that up in saying, "No, we're not going to be cutting rates or changing their path anytime soon." You know, we're going to keep looking at what he called the totality of data. He even went so far to talk about the lessons learned from the 1970s and how the Fed then at that time talked about...what they did was they cut rates too soon because inflation started to come down, recession risk was rising. And Chair Powell said that was a mistake.
Well, what do we have right now? Well, we have inflation coming down a little bit. Peak inflation, good chance that's behind us. And then we have recession risk rising. Chair Powell said, "Basically, I don't care. We're gonna keep raising rates. We gotta get inflation completely under control." Because when the Fed cut rates in the '70s, that really laid the foundation for the early '80s hyperinflation environment.
Scott: Yeah. And I think what spooked people is when he basically said, "If this causes a recession, so be it. It's what we need to do."
Andy: Yeah. And that's a scary thing for markets because markets typically don't do too well during recessions. But, as you pointed out, you know, they're usually higher. And when you look at it over a long enough time period, you know, like over a 10-year period, the stock markets are higher basically 100% of the time almost from a historical standpoint. So, when you look at that, the longer-term investors, you know, those are gonna be fine. But if you have cash, you know, or if you have immediate cash flow needs, you probably don't wanna have that at risk, in general, just because that's not prudent to begin with, regardless of what the market is doing.
Scott: That reminds me. And this was in early 2000, like January of 2000, talking to this guy, and he had his property tax money... It could have been in late '99. I don't remember. He had his property tax money in a tech fund. This is when the dot-coms were going through the roof.
Pat: Oh, got it.
Scott: And I'm like, "These are dollars you're gonna need in four months when you're probably..." Yeah. I'm like, "You're out of your mind having it in those investments," right? Like, if it's 20 years from now, awesome, but, like, four months?
Pat: Yeah. Hey, can you talk a little bit, Andy, about unemployment? And I saw a statistic yesterday that there's two job openings for every unemployed person in the U.S. I don't know whether that was true or not. I saw that statistic, and it's hard for me to believe.
Scott: Unemployed, you're talking about these are people that want to work, not people that could be employed, able-bodied adults.
Pat: Yes. Correct, or what they call the participation rate. Can you expand a little bit about what's going on in the labor markets? I don't understand it, quite frankly. It's perplexing to me.
Andy: Yeah. So, that's pretty accurate, actually. It's at 1.98 job openings to unemployed people. And what we're looking at there is a release that came out earlier this week. It's called the Job Openings Survey, and it showed that there was 11.2 million job openings. So, it's almost two times the number of unemployed people. And a lot of that just has to do with how hard it is for employers to still find work. And this does make the Fed's job a little bit more difficult because they don't like seeing that, because when you have all of these job openings compared to the number of unemployed people, that means that employers will have to pay up for workers, which means...
Pat: Yeah, which is inflation.
Andy: ...there's more wage inflation, which means the Fed needs to raise rates more.
Pat: Wow. It just seems like a strange thing to me. Like, how many people have left the workforce with no intention of returning?
Andy: Yeah. There's been quite a few who have [crosstalk 00:12:33]..
Scott: How do they eat? I don't [crosstalk 00:12:34]. I don't understand that. Where do they get the money? That's right.
Andy: Well, there was a lot of money handed out from the fiscal stimulus, right? Then they did participate in some of the upside in the stock market, if you look at just where wealth has been distributed over the past couple of years. So, right now, though, if you look at savings, it is starting to dwindle. We're not at...and we're getting close to a level where people, you know, more people might need to re-enter the labor force. So, when you look at it from that perspective, the savings rate, the personal income, personal spending, all of that data that suggests there probably is some people getting ready to enter the labor force over the next few months, because, quite frankly, they are running out of money as far as that goes.
Pat: That's awesome. That's crazy. I'm gonna have to sell my sprinter van and get a job.
Scott: Most aren't the sprinter vans, though. I think it's...
Pat: People just sitting on the sidelines.
Scott: I don't know.
Pat: I don't get it. Anyway. Andy, as always, thank you, thank you, thank you for joining us. Always appreciate your insight.
Scott: Yeah. Great having you with us. And thanks for all you do with Allworth as our chief investment officer as well. Let's hit the calls now. Let's start here with Mike in California. Mike, you're with Allworth's "Money Matters."
Mike: Hey, good morning. How are you guys doing today?
Mike: Just a real quick question. I'm getting ready to sell a home down in the Bay area, and what I'm looking for is how can I minimize my capital gains liability? I'm looking at it probably about $1.2 is what we're going to list it for over what I originally paid for the home.
Pat: And primary residence?
Mike: Yeah. It was. We've moved up to a new home, our vacation home. We're staying there now.
Scott: And how long ago did you move out?
Mike: Well, I've held both homes for a couple of years now. So, we've moved out about four years ago. We bought the other home.
Pat: Has this ever been a rental home?
Pat: Okay. So...
Scott: So, it's still your primary residence?
Pat: It's still your primary residence?
Scott: Okay. And you're married, is that right?
Scott: So, you'll avoid $500,000 of the $1.2 million gain, and then whatever you put into the house in capital improvements will lower that amount too. Above and beyond that, you're gonna write a check. I mean, the only way you could avoid that is if you can gift something to charity this year, that would reduce your tax liability. And if you gave some [inaudible 00:15:12]... Because this is what the problem is. This is gonna push your ordinary income into higher rates too. You can gift... Let's say as an example, you gave $10,000 of a security that you'd owned for years that had a lot of capital gain, you gave that to a charity, maybe even a donor-advised fund. You could take a tax deduction on that, which would go against some of your top tax rates and would reduce your tax liability on the capital gain.
Pat: But that's tax planning that you should be doing every year anyway.
Scott: I mean, you can't do it...you can't exchange this. [crosstalk 00:15:49]
Pat: You can't exchange it.
Scott: Look, here's the challenge. It's not really a challenge. This is a reality. The real estate market has been on fire the last couple of years, and much of this gain has come in the last couple of years even, right? It's incredible the prices of real estate. And how big of a house are you selling, Mike?
Mike: It sits in the Bay area. So, it's only 1,000 square-foot home.
Scott: It's 1,000 square feet, and how much are you listing it for?
Mike: About $1.4.
Pat: And you paid $200 grand for it? Good for you.
Scott: When did you buy the house?
Mike: We bought back at the bottom in the mid-'90s. So, we...yeah. So...
Pat: And so, and you had another vacation...a vacation home that you bought years ago before you had a price appreciation there, correct? How long...
Mike: No, we've only owned the vacation home for about four years.
Scott: Well, that's...No, no. You bought it before... You did really, really well. Your timing was excellent, excellent, excellent. Yeah. But there's nothing you could do around that $700,000. No. [inaudible 00:17:00]
Pat: You could just smile.
Scott: You could give money to charities or appreciated assets to charities.
Pat: And unfortunately, California are gonna whack you quite a bit, too.
Scott: Yeah. Did you move out of state, just out of curiosity?
Mike: No, no. I wasn't able to talk the boss into that.
Pat: I understand that. I'm living in the same world.
Scott: As I joke with the...the top tax rate in California's 13.3%. And I was talking to Pat one day and he's been talking about wanting to get out of California for years, and I said, "Pat, finally..." He's frustrated because his wife loves living where she lives. And I said, "Well, you have a choice. You can either pay 13.3% to Gavin Newsom or 50% to Cathy." That is it.
Pat: And then my wife talked about... Like, I have a place up at... I didn't grow up with a lot of money, but I have a small vacation house up in the mountains in the Sierra Nevada where it gets lots of snow. My wife is like, "Well we could live up there in the winter because it's in Nevada." And I'm like, "Honey, that would be the 'The Shining.' It would be 'The Shining,' the movie, all over again. It is not worth the emotional turmoil that it would bring to our relationship."
Scott: But in all sincerity, Mike, this is a good problem to have.
Pat: It is what it is.
Mike: Yeah. Okay.
Scott: Yeah. Sorry. Congrats.
Mike: I was hoping I could put it into our Roth or something like that.
Scott: No. There's nothing... The only thing you could do is give it away, and then for every dollar you give away, you save 25 cents in taxes. So, you're still out, but there's a little more than that.
Mike: Would my grown children be considered charity?
Scott: No. Not technically. Only internally. I mean, technically, you could gift a portion of your home to...it wouldn't...
Pat: Yeah. It wouldn't help there.
Scott: The capital gain would be...they would receive the capital gain. It's supposed to... But it's not...if this was a...
Scott: ...a $14 million commercial property or something, you're looking at estate planning, then it might make sense, but I wouldn't do this. So, I appreciate the call, Mike.
Pat: I appreciate the call.
Scott: And isn't that interesting, Pat? And you look, 1,000-square-foot house. He bought it in the mid'90s, so who knows when it was built? It was probably built in the '50s or '60s, $1.4 million. How does the typical young person or couple get into a starter house these days?
Pat: Well, what's amazing is that the prices have been able to...that they've gone up, right? This is the San Francisco Bay area. You hear about people leaving, you know...
Scott: There's a net decline of the population. I don't understand why the homes are [inaudible 00:19:43]
Pat: The prices haven't reflected that yet. And 50% of all office buildings, it is estimated right now, are not occupied, office buildings across the U.S., 50%. There's leases in them and people coming in, sometimes.
Pat: But the square footage that is utilized on an annual basis per employee, they estimate it's 50%. This is just an amazing number.
Scott: Let's talk now with Laura. Laura, you're with Allworth's "Money Matters."
Laura: Hi, Scott and Pat. Thank you so much for talking with me today. I'm 57 and I'm a public-school teacher.
Scott: Thank you.
Laura: I plan to retire... Yes. I enjoy it. I plan to retire in three years at age 60. And Pat mentioned that his daughter is a public-school teacher and that several vendors had come to her school to pitch their product, and his reply to her was, "Well that's great, but we're not doing that." And I'm just wondering, I know she's at the beginning of her career, it sounds like, and I'm at... But I'm wondering how, Pat, did you advise her to invest her money for retirement, if that would apply to me.
Pat: Thank you. So, it would not quite apply to you. It wouldn't...
Scott: Because you're not Pat's daughter getting free financial advice.
Pat: No. That's not true.
Scott: Well, that is true.
Pat: No. That is not true because that person last week, I actually...I gave the phone number... They called us [inaudible 00:21:29] still came up with their financial...so it was free financial advice.
Scott: Then they asked me afterwards, they said, "And which advisor should we have them do the work for free that Pat just promised?" So, I said, "Don't ask me. Pat's the one that made the promise."
Pat: [inaudible 00:21:44] after that really?
Pat: Oh, yeah. So, here's why, Laura. My daughter is 23 and you're 57. So, I had her put 100% of the dollars into equity. And, in fact, I just had her put 100% of the dollars into the total stock market. For you...
Scott: Different stage of the career.
Pat: Yeah. Your risk tolerance isn't...you probably don't have enough time for all kinds of volatility for 100%. But, you know, probably 60% to 70% of the portfolio should be total stock market and the rest probably the short bond. I don't know if that's what you're doing now or what you have it in.
Laura: Yeah. It's in a variable annuity at 45% stocks, 55% bonds. Yeah. I'm contributing the maximum right now. My husband and I were late to this retirement-planning game.
Scott: Are there great...
Laura: I just learned so much from...
Scott: Are there great guaranteed income provisions to this annuity or just what someone had set you up?
Laura: It was the one and only vendor available at my school...
Scott: Yeah. There we go.
Laura: ...when I set up this first.
Pat: You know, there used to be they'd only allow so many payroll slots in the...
Scott: Crazy system.
Pat: ...in the system. And it really is kind of a crazy system.
Scott: Every other employee, they pick a 401(k) and everyone has the same 401(k), and here's your myriad of options.
Pat: It's a strange thing. So, with you, you know, even in the variable annuity, you probably won't annuitize it at some point in time. As long as it's a relatively low cost, I would meet with that advisor and move 60% to equities. You're a little light on the equities, and I'd feel much more confident moving money to equities, since we've had a 20% decline in the market, than I was a couple of months ago. And then just stick with it. But if you and your husband are close to this retirement age that you're gonna retire in three years, you really should sit down and actually do some financial planning. And one of those things that you should look at is you're gonna be forced with a joint or survivor question, distributions from the variable annuity. Do you roll it into an IRA? All kinds of questions. And is your husband still in the workforce or..?
Laura: He is. In fact, he's only 51. He has nine years left.
Pat: Even more important.
Laura: And he has a pension and an annuity.
Pat: Even more important.
Pat: Even more important. The age difference. Do you have children from previous marriages?
Laura: No. No.
Laura: We have two daughters. They just graduated from college, and now we're in a position finally to say...
Scott: This is very common, Laura.
Pat: Very common.
Scott: Very, very common. This window, your last one, either in college or through college, people are like, "Oh, crud. Retirement's around the corner. We better figure this out."
Pat: Let's start counting what we've saved is really what the mantra is. So, you really wanna do...sit down with a qualified advisor before you make an allocation change on that variable annuity. You wanna sit down with a qualified advisor and say, "Can I retire in three years? What does it look like?" That's probably the best way. Now, I have a question for you. What grade do you teach?
Laura: I taught first grade for many years, and now, I have a position where I am an intervention teacher for students and small groups.
Pat: God bless you. God bless you. Seriously. That's some work.
Laura: That's truly the most rewarding work I have ever done. I love it.
Scott: Good for you.
Pat: I wouldn't last a day. I wouldn't last a day.
Scott: Glad you called, Laura. I'm glad to have people like you in the world too, frankly.
Pat: Appreciate the call.
Scott: We're gonna take a quick break. When we come back, if you wanna join us, we'd love to take your call. Our number to be part of the program is 833-99-W-O-R-T-H. Again, that's 833-99-W-O-R-T-H. You're listening to Allworth's "Money Matters."
Man: Can't get enough of Allworth's "Money Matters?" Visit allworthfinancial.com/radio to listen to the "Money Matters" Podcast.
Scott: Welcome back to Allworth's "Money Matters." Scott Hanson.
Pat: And Pat McClain. Thanks for sticking with us.
Scott: Yeah. It's amazing. You know, it's interesting, Pat, how we have some listeners who have listened, like that last time. I've run into people... We've been doing this long enough that I'm 55 right now. We started this 27 years ago, right?
Scott: So, there are some young listeners 27 years ago that are now at retirement age.
Pat: Yes. That's true.
Scott: And I have no intention of retiring yet.
Scott: Not for many years.
Pat: I don't know. Sometimes... I think I'll never retire. But I traveled for business this week, the week before last, and I gotta tell you....
Scott: It's not glorious traveling for business? Flight delays?
Pat: You know, when you're supposed to arrive in your hometown at 9:00, you get there at 1:30 in the morning and you know you have a meeting the next morning at 8:00 and you're like, "Oh." And then I think, "It's not too bad." [inaudible 00:27:16].
Scott: It beats going across the country in a covered wagon.
Pat: Correct. That is a lot. I'm not gonna complain about air travel. I'm just not. I'm just not. I'm like, "This could be a lot worse."
Scott: Right. Let's go to the calls here. Let's talk to Jeff. Jeff, you're with Allworth's "Money Matters."
Jeff: Hello, how are you?
Scott: Hi, Jeff. Thanks for calling.
Pat: What can we do for you, Jeff?
Jeff: Well, we are approaching retirement, like every other person that calls you guys. My wife is retiring at the end of this year, and I'll probably go another two years. And just wondering about social security and when to take that in kind of overall picture.
Scott: How old are you, Jeff?
Scott: And your wife is?
Pat: And will either or both of you be receiving a pension?
Jeff: She works for Kaiser, so we werethinking lump sum, but it could be a pension.
Pat: And if it was a lump sum, how big would the lump sum...how large would the lump sum be?
Jeff: Around $650 to $700.
Pat: Okay. So, it would actually convert into a decent-sized pension as well. That just gives us... And how much money do you have saved for retirement above and beyond this $650?
Jeff: Well, our total net worth is about $5.7.
Pat: And does that include any of your primary residence or second homes?
Jeff: Yes. And some rental properties and things.
Pat: Well, let's leave the primary residence and second home out of it. How much is it with...?
Scott: If you have a vacation home that you don't rent.
Pat: That's right.
Scott: Otherwise, yeah. What's your primary home worth?
Jeff: About $1.7.
Pat: Okay. So, $4 million.
Scott: And what's your combined income right now between the two of you?
Jeff: Combined gross is about $300.
Scott: And you're both maximizing your company savings plan, retirement plans?
Scott: Are you saving in addition to that on an annual basis?
Jeff: Mm-hmm. Yeah. Through HSAs and...
Pat: So, your question is, when do you start social... Are you asking do you have enough to retire?
Jeff: Well, I think we have enough to retire.
Pat: I do too. I believe that is true.
Jeff: Yeah. Although we'll be moving out of California, but...
Scott: It means you have even more money to retire on.
Pat: Unless you move to, like, New York City.
Jeff: No, no, no.
Scott: Where are you moving to?
Scott: Okay. And what will a house cost you in Florida?
Jeff: Probably about the same. Between $1.5 and $2, I would guess.
Pat: So, you obviously have enough to retire. And I guess the second question is when do you start social security?
Jeff: Yeah. Mm-hmm.
Scott: What are you leaning towards?
Jeff: Well, we have enough cash that she could wait for a while, or we could start sooner rather than later. I mean, I guess the biggest issue would be potential legislative risk, but...
Scott: That's Right.
Jeff: ...who knows what that's gonna be? So, I don't know if we just...if we wait and let it build up a little bit more [crosstalk 00:30:44] retirement earlier.
Scott: If you wait...so, obviously, every month you wait, the check is larger, right?
Jeff: [cosstalk 00:30:52].
Pat: And assuming you have a normal life expectancy.
Scott: But if you don't, you're not there around, you know... So, I think the bigger issue is, like, at what age would you have to make it to before, even if there was some legislative risk, whether they increase the taxation of it or something like...would it make sense for you to defer it? And we don't know the answer until 20 years from now.
Pat: Yeah. I don't know. Which is a legislative risk. I'm inclined. I'll tell you what? I'm inclined to do. I'm inclined to actually start hers immediately.
Scott: And Jeff, and it might feel to you like there's lots of people at your financial position at your age. They're not.
Pat: There is not. There might be a lot of people like you around you.
Scott: Yes. But you're top 1%.
Pat: Easily. Easily. You know, in the circles you run in, so it doesn't feel like... Right? Like...
Scott: You live in a neighborhood. I imagine there's other nice-sized homes and...
Pat: Yeah. It's a $1.7 million home.
Pat: I'm guessing that those people are probably...most of them have money. Some are big hat, no cattle, but most of them are probably not. I would be inclined to start hers immediately.
Jeff: Now, what about...would it make sense... We have some money in Roth, but most of our retirement is in 401(k)s and IRAs. So, when we go there, would it make sense to hold off on the social security and then get money into the Roths?
Scott: What's your annual income now?
Pat: It's $300.
Scott: No. Yours personally.
Jeff: About $175.
Scott: Okay. So, when your wife retires, you're still $175. You can funnel some money in your 401(k), but you're still...$150 grand is gonna be taxable income flowing through.
Pat: Yeah. I don't know if your...
Scott: Of the $4 million, how much is in 401(k)s and IRAs?
Jeff: About $1.5 million.
Scott: Oh, and then if she ends up taking a lump sum, that's gonna be $2.25 roughly.
Pat: I don't know if you're ever gonna be in a great opportunity to convert to Roth.
Pat: I just don't think you'll...I don't think you'll be there. I mean, there might be maybe one year.
Jeff: Well, [crosstalk 00:33:11]
Pat: I mean, even then you could suspend your social security for a period of time.
Scott: That's right.
Pat: Right? If you wanted to do it, you don't have to...you know, she can suspend it anytime she wants between now...
Scott: That's right.
Pat: ...or the time it makes sense between now and age 70. So, I'd be inclined to start hers. And, you know...
Scott: If I were you, if I were 65, my wife was 64 in this financial situation, I would have her sign up for social security the day she quit working.
Pat: That's right. That's right. That's right. And then, you know, if you change your mind, you could suspend, or if you think, "Well, there's less legislative risk in the future."
Scott: You've gotta live to about age 84 before it makes...82-84 depending on...before it makes sense to not take it immediately.
Pat: On the pure math alone.
Scott: On the pure math alone. So, that...
Pat: And then if you add legislative risk on top of it, who are they gonna take social security benefits away from? People that don't need them.
Scott: Yeah. And your lifestyle is not gonna be any different whether or not you have social security coming in or not.
Pat: Yeah. So, after a great analysis and us telling us we really wouldn't know the answer for another 20 years, I would be inclined to start hers the day of retirement.
Pat: And I doubt if you ever get over to the Roth conversion side of the table either.
Jeff: Well, we could. I mean, the other thing I was thinking when we go to Florida, A, we get rid of the state tax in California, but, B, if we lived off cash for a while when I retire, then that might be an opportunity.
Scott: Yeah. But you're a couple more years out, right?
Scott: So, it sounds like you don't quite know exactly when that's gonna be? Like...
Pat: I'd worry about it when I got there.
Scott: Or working because you're still enjoying yourself and you realize at some point in time you're gonna quit working, but...
Pat: Yeah, I'd worry about that Roth when I got there.
Scott: I would too.
Jeff: Okay. Because you can always start social security and then suspend it.
Scott: That's right.
Pat: That's right.
Jeff: Pick it up.
Scott: That's right.
Jeff: And so, if you suspend for a year, then...
Pat: It's just a cruise more in the future when you [crosstalk 00:35:07]
Scott: Yeah. Just like if you hadn't signed up for it originally.
Jeff: Gotcha. Okay.
Scott: All right, Jeff.
Jeff: Okay. All right.
Pat: All right. Thanks. And listen, we're gonna miss you here in the state of California. And most of all, the government is gonna miss you.
Jeff: Yeah. They might miss me a little bit more.
Pat: I think that they will miss you a lot more than we'll miss you.
Scott: That's right. Here's someone with this kind of net worth leaving the state.
Pat: I know. Like, bye-bye. Bye-bye. Actually...
Scott: Well, good for you.
Pat: I was in Nevada. I was in...
Scott: Appreciate the call, Jeff.
Pat: Oh, thank you. I was in Nevada a couple of weeks ago and I was talking to a bunch of people that have moved there. Like these beautiful neighborhoods that are right over the border, less than 20 miles from the state of California's border. You can't even buy a house. You can't even...there's a waiting list to buy a lot. I mean, they just can't develop it fast enough. I mean, that's how flow of capital works, isn't it? There was almost [crosstalk 00:36:09]
Scott: There was gonna be another proposition on the ballot this fall to raise taxes on the wealthy yet again. I'm, like, there is some point that people are just gonna say, "I can't afford it anymore."
Pat: Or I don't want to.
Scott: You know, it's interesting. You talk to people, and particularly if someone, like, sells a business, that sort of thing. I mean, the amount of... It literally can be like buying a $1.7 million house somewhere. It's like I just gave the tax man the money. That's the reality for me.
Pat: Yeah. Move to Florida, get a free house.
Scott: Yeah. The only problem with Florida is you gotta live in Florida. No, I hope you enjoy it, Jeff.
Pat: It is a...
Scott: Actually, the weather is nice a good part of the year.
Scott: Sometimes. Yeah. Let's go to Texas now. We're talking with Pam. Pam, you're with Allworth's "Money Matters."
Pam: Hi, guys.
Scott: Hi, Pam.
Pam: How are you all?
Scott: We're doing great. How are you doing?
Pam: We're doing good. Okay. Here's my question. My husband is two years from retirement. We have two homes totally paid for. We're gonna be selling one home and moving into our lake house when that happens.
Pam: I work full time. I'm a real estate broker. He's an engineer. In two years, we'll both be 70.
Pam: So, we'll take our max social security. I have probably $300,000 in Edward Jones, and the house we'll sell will be about $400,000 cash. We haven't had any mortgages for over 10 years.
Scott: Okay. You're a conservative real estate agent, because most of your peers don't live that way.
Pat: I knew there was one left. There had to be one.
Pam: There's one of us that pay our taxes early and have money in the bank. Yeah.
Pat: All right. So much for those real estate clients we were going to get, Scott.
Scott: Yeah. That's right.
Pat: But thank you. I'm sure...
Scott: Well, come on. Oftentimes, it seems like...particularly at the end of a market cycle, they load it up.
Pat: They load up. Yeah.
Scott: Yeah. Big mortgages.
Pam: Yeah. Well, right now...well, for the next two years, we'll be shaking out all those realtors that don't need to be in this business. So, this is my 48th year. So, it's not my first rodeo. So...
Scott: So, you can actually use that term coming from Texas, so...
Pat: Not my first rodeo.
Pam: Yes. Exactly.
Pat: That means nothing that work...
Scott: For me living in the suburbs of Northern California.
Pat: Yeah. That means nothing to us people out here. So, anyway, so you've got $400,000 in cash from the sale of the house.
Pam: Yes. And I want to invest that somehow that it'll throw off enough to pay my property taxes here and insurance and a trip to Hawaii every year.
Pat: Got it. But you're talking in two years.
Scott: Okay. How much money do...so, how much on an annual basis is that?
Pam: Will we get?
Pat: No, no, no, no. How much money do you need to do what you just said?
Scott: How much money do you need?
Pam: Oh, I probably need about $25,000, $30,000 for that.
Pat: Okay. So, at $400,000, that's...at $25,000, that's a 6.25% rate of return. So, you're not gonna get there without risk.
Scott: Or, we don't talk about... I mean, one way to do this if this is truly the one thing you're trying to accomplish with those dollars, you could buy an immediate lifetime annuity, joint and survivor annuity on you and your husband. When you do something like that, you give up control of your principal. It's gone and you don't have the $400 grand. It's kinda like buying a pension.
Scott: You'll get a higher equivalent yield because you don't have the principal anymore.
Pat: What other assets are there?
Scott: I'm just throwing it out there.
Pat: Listen, Scott. I know. I hear you.
Scott: I don't think that's exactly what it would end coming down to, but...
Pat: That's right. So...
Scott: What are you taking out of the $300,000 in your brokerage account?
Pam: Well, we plan to, like, take $2,000 a month.
Pat: Okay. That's $24,000. So, that's 8%. And are there any other assets anywhere? 401(k)s, IRAs?
Pam: Well, we have a building that... No, that investment account has all those, and we probably have $100,000 liquid in our savings all the time.
Pat: Okay. and what's the value of the building that you own?
Scott: And are either one of you on social security now?
Pam: No. No, we wanna wait and take the highest amount.
Scott: Yep. That's wise.
Pat: And what's the...
Pam: So, we should make about $7,500 a month on that.
Pat: And what's the value of the building that you own?
Pam: It's worth about $100,000 and it has an apartment in it that will probably throw off about $12,000 to $15,000 a year.
Pat: Well, there's...you know, we don't...
Scott: You didn't get 12% to 15% gross rent on a... I'd go buy more of those things.
Pat: That's actually...that is really good.
Pam: I would like to.
Pat: That's really good.
Pat: That's really, really good. It's probably worth more than that.
Pam: Yeah. Well, Yeah. It's a lake property, so...
Pat: Okay. So, to answer to the question is to achieve that objective right there. And Scott is right. An immediate annuity is an answer. The reason I would probably stay away from it is because one of the things that you said you wanted to do with the money is to go to Hawaii every year. You're in your '70s. The idea of you going to... And it happens. I have clients that are in their '90s that go to Hawaii, but not...
Pam: No, we only...I only think we'll go for 10 years of travel.
Scott: Okay. Most of [inaudible 00:41:58]
Pam: And I figure by 80, we'll just stay home.
Scott: Pam, you are the perfect candidate for a financial plan. Like, meeting with advisor, you put all these inputs in, you can do lots of different what-if scenarios, and you can say, "Okay, 10 years of Hawaii." And you can plug all those in because I think, my concern anyway is, is if you were retiring today and you said, "I'm gonna take $2 grand a month out of my brokerage account, and I want $25 to $30 grand a year out of my 401(k), my 400,000 from the sale of the house," my concern is that you're gonna watch your savings dollars start to decline.
Pat: And it's not that you'll run out of money, but you will use that up because of those... The numbers you gave us are percentages that you were taking out are high numbers, right?
Scott: In today's world.
Pat: In today's world. So, they may not be... If interest rates in two years are, you know, the 10-year treasury is at 5%. Holy smokes. There will be a lot of damage between now and then if it gets to 5%. I'm just telling you. I'm just...
Scott: On a 30-year mortgage.
Pat: On a 30-year mortgage.
Pam: And it hasn't in 10 years, so...
Scott: I mean a 30-year... You're talking about 10-year treasury.
Pat: A 10-year treasury.
Scott: It used to be double digits.
Pat: That's what I said. If it gets to 5% in the next two years, there'll be a lot of damage to get there. So, what happens is that, in today's environment... Now you're asking me about something in two years from now. But today's environment, those types of withdrawals that you wanna take from those two accounts are high as a percentage.
Scott: So, we need to find some other creative ways to make this happen.
Pat: Or take less money, or realize you're using up some principal over time and that you know how long you're using that principle up over time. But what you just said to me is I want to take...
Scott: And back to my point on... I mean, if the plan is to use up some principle over time, you could actually say, "We're gonna earmark 10 years' worth of Hawaii." My challenge there is what happens at year 11 and you still feel good and you wanna go again and you can't.
Scott: Right? So...
Pat: Yeah. But the numbers you share...
Pam: You have to drive to Galveston. This year, Hawaii is in Galveston, and you're taking your car.
Pat: Oh, God. That is okay. We were like...
Scott: In August.
Pat: Galveston is cheaper. Just pretend. "Look, we're going to a Lūʻau." "Well, that's not a Lūʻau."
Scott: Your eyesight will be so poor at that time you can't tell the difference.
Scott: They were like, "Mom, this isn't a Lūʻau. That's not a roast pig. That's a chicken."
Pam: "Grandma, why does Galveston look like Hawaii? Why are y'all telling me this is Hawaii?"
Pat: All right. You'll be fine. Exact grandma. "How did we drive to Hawaii, grandma?" Anyway, we are two years. We have beat this joke up.
Scott: You're two years away from retirement.
Pat: Go get a financial plan.
Scott: Go talk to a good financial advisor, and you'll run through some...
Pam: Okay. The problem is I don't wanna lose the $400.
Pat: I know. But...
Pam: The lake house is worth $500. That's plenty to leave to my kids when we die, because they don't want any of our stuff anyway, except money. So...
Scott: I know, but...
Pat: So, like, maybe one plan is, if we end up spending down our money and we're still alive at 85, we use a reverse mortgage.
Scott: Maybe. But running through these scenarios, you're gonna get some confidence.
Pam: And so, really sure I would never tell anybody to do a reverse mortgage. [crosstalk 00:45:33] so bad.
Scott: Well, that's because you've never met anyone that... I know. But you've never met anyone that really...
Pam: Yes. I have sold houses that they were reverse mortgage and the people got S-C-R-E-W...
Scott: You may have thought that, but what they did is they didn't make house payments for years and years and years, which allowed them to stay in the home. So, look, I am not...I could argue for and against a reverse mortgage, but what we do know...
Pam: I know. I'm just saying, if you can't afford your house, sell it, take the money, and go get an apartment, you know.
Pat: Well, okay. So, that might be an option for you to continue to go to Hawaii, right?
Pat: But anyway, you need a financial plan.
Scott: Yeah. [inaudible 00:46:17] some of these senarios and figure a way [crosstalk 00:46:19].
Pat: Appreciate the call.
Pam: Okay. Well, I have a financial person, but I'm just not happy with them, because they're not giving me...
Pat: Oh, well, then fire them.
Pam: Yeah. They're losing money and they can't tell me what to do with that $400.
Pat Oh, well, then fire them.
Pam: You, know, they go, "Well, two years is too far away for me to tell you what to do, blah, blah, blah."
Scott: Two years. You're not spending it all in two years. You've got your whole life ahead of you.
Pat: Yeah. What you're asking for, you don't have a financial planner, you've got an investment advisor. There's a difference between a financial planner and a broker.
Pat: So, you want someone to actually put on paper what it looks like with a given scenario. What you had is someone said, "Well, I've gave you $400 grand. This is what I'd do with it." And you're like, "I don't..." That is part of the equation. So, get a financial planner.
Pat: So, I appreciate the call.
Scott: All right, Pam. Wish you well. And let's now talk with Tom. Tom, you're with Allworth's "Money Matters."
Tom: Hi, how are you?
Scott: Good. How you doing, Tom?
Tom: Okay. I'm 60 years old, and my wife is 56. So, I have two questions, basically. The first question is what is the best way to tap home equity to fund retirement, assuming I wanna pretty much stay where I am? I was looking at reverse mortgage. And one other thing to this question, leaving a legacy is not a priority for me.
Tom: So, that's the first question.
Scott: You want your last check to bounce?
Tom: Second question... [inaudible 00:47:56]. I don't think I can [inaudible 00:47:59].
Tom: If I know that answers the question, then...
Scott: Exactly. It would not be a good thing. What's the second question for us?
Tom: Is how do you balance between co-controlling income for Obama Healthcare Plan to get the most subsidy versus Roth conversion, since my wife is four years younger than I am? So, those are my two questions.
Scott: Got it. The second one, I don't think we're gonna be able to offer much advice on, just because don't have a lot of experience with people at that low-income level to qualify for the Obamacare plans.
Pat: Yeah. But you asked about Roth conversions. How much money does your wife have in an IRA?
Scott: Well, if you do too much Roth, it has income thrown on your tax return and you won't qualify for your...
Tom: Yeah. Well, I was hoping to play the income game because you can, you know, get it to the point where I get the large subsidy.
Scott: That's right.
Pat: So, how much money do you have in IRAs?
Tom: I'm assuming...I have about about $1.2.
Pat: Okay. And are you employed right now?
Tom: Yes. So far, yes.
Pat: Okay. And what's your family income between you and your wife?
Tom: About $200.
Scott: When do you plan on retiring?
Tom: Well, I'm 60 now. Probably won't make it till 64, 65. So, 61, 62, or 63. Sixty-one sounds likely.
Pat: And how much money do you have outside of IRAs and brokerage accounts or savings accounts?
Tom: So, $1.2 pretax/401(k), $300 Roth, $1.5 outside in a brokerage.
Scott: Okay. Beautiful.
Pat: All right. Now we're feeling a lot better [crosstalk 00:50:04].
Scot: Now, we can start off talking about...
Tom: Oh, no, no. You haven't heard the rest of the story yet, because I'm gonna...you guys gonna lambast me bacause I do market timing and I screwed up.
Pat: Okay. Well, actually, you know, market timing doesn't... Well, I don't need to tell you about market timing. So, here's what... You have an incredible opportunity to lower your income to zero and qualify for that. The question is, is it...
Scott: ...worth it at the expense of other options you got?
Pat: Of converting to a Roth IRA at age 72 or 75 or whatever it is? So, I couldn't answer the question now, but I love the way you're thinking about it, right?
Scott: Because you're not retired.
Pat: But you're not retired, right? If you were retiring tomorrow, we would know up-to-date rules on all of these things, and then you build spreadsheets that would tell us what the IRA will grow to over a period of time and spend all this money down, and then required minimum distributions. So, that's the answer to that question.
Scott: The first question though, on tapping... Like, if leaving legacy is not important, a reverse mortgage can certainly be the right thing for you. You gotta both be 62. So, we're still six years off. Things could change between now and six years on how the programs work, but they've been around pretty consistent for a long time. I mean, they can work really well, particularly for someone who doesn't plan on leaving the house to the kids, right? So, if that's not your plan, I think clearly having that reverse mortgage as a tool, you've got quite a bit in savings and investments. So, it may not be necessary. I kinda like to think of the reverse mortgage as the last...it's the last trip to the well. So, anyway. But it's certainly an option for you in the future. Appreciate the call. Thanks.
All right. Well, we are out of time. It's Labor Day weekend. Hope everyone has some good plans for the rest of the weekend. It's always a good time. So, anyway, we'll see you again next week. This has been Scott Hanson and Pat McClain. Allworth Financial's "Money Matters."
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or an estate planning attorney to conduct your own due diligence.