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

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

Pat: I'm Pat McClain. Thanks for joining us.

Scott: Glad you're with us as we talk about financial matters. Myself and my co-host here are both financial advisors helping folks like yourself make wise choices with their finances, and broadcast our podcast and radio program to be of benefit to you.

Pat: As I have said to my children since they were young, make good decisions.

Scott: Okay. That's Dad's advice.

Pat: Yes. Whatever that means.

Scott: Make good decisions.

Pat: Make good decisions. Whatever that means.

Scott: Well, it's important with finances too, right?

Pat: Well, yeah, that's my point. At least try to make good decisions with all the available information that you have at the time.

Scott: Yeah, and make the most with your financial assets.

Pat: That's the hope. That's the hope, right?

Scott: That's the objective.

Pat: Okay.

Scott: I think, yeah, you could do more than just hope.

Pat: With a good plan.

Scott: Can you not?

Pat: Yes, yes, yes.

Scott: Okay. I think it's a lot more than hope. I hope it works. I'm like, "You're on the blackjack table. I hope I get the right card."

Pat: Oh, I see. I've had clients...

Scott: Please don't have a face card.

Pat: I've had clients say to me that, like, "We're just gonna play the lottery." I'm like, "That is a strategy."

Scott: A foolish strategy.

Pat: Not a successful one, but it is a strategy.

Scott: That's where hope is involved.

Pat: That is where hope is. But anyway, it's more than that.

Scott: Yeah. And if you wanna be part of our program, I'd love to take your calls. I'll obviously chat with you and hearing what's on your mind. Questions at moneymatters.com, you can send us an email there, or you can call 833-99-WORTH to join us. And it looks like the financial markets have been selling off a bit. Long-term interest rates, all of a sudden have taken off.

Pat: This inflation thing, it's perplexing.

Scott: It's transitory.

Pat: That's what they said at the beginning, but we know when they said it was transitory, yeah, that's not it. But it's in pockets. It's in pockets, and there's things...This United Auto Workers strike is really troubling. You not think so?

Scott: Well, there's a number of strikes.

Pat: Okay. So, in Hollywood. Come on. [crosstalk 00:02:59.245]

Scott: I just saw some article that the late-night shows are gonna be back airing again. I'm like I didn't even know they were off the air. I haven't watched one in years.

Pat: Right? I mean, the screen actors go, "Yeah, I get it." I mean, I get that. They're on strike and the AI and blah, blah, blah. But it's such a small portion of the economy, but the United Auto Workers, I mean, that...it's all three companies that have been targeted.

Scott: Yeah, yeah.

Pat: I mean, it's a big deal.

Scott: They're just messing with them.

Pat: Oh, it's strategic.

Scott: Yeah.

Pat: Yeah. It's knife-like. They're just like, "We're gonna cut this..."

Scott: Poke you here and poke you there.

Pat: "...poke you there." And that is inflationary. If it's prolonged, this will drive inflation. You not think?

Scott: Well, it depends how...Well, we have less supply of cars.

Pat: I guess it depends on how the consumer reacts, right?

Scott: And it's looking like the consumers finally starting to like, "Whoa, these higher interest rates are a real deal."

Pat: New home sales.

Scott: They've declined. Overall home sales have declined, we should say.

Pat: Well, it is what it is, huh?

Scott: Well, that's why the market is not anticipating the Fed to increase rates anymore. And the market is anticipating the Feds are gonna start lowering rates next year, of course.

Pat: And the Fed doesn't know.

Scott: Nobody knows. Nobody knows. What we do know is whatever cycle we're in will eventually end and a new cycle will take over.

Pat: But my favorite the last week or so, news piece was that Rupert Murdoch decided to retire at the age of 93. You're like, "Really?" This is newsworthy? How involved do you think he was? You think he's showing up in the office every day?

Scott: I don't know. I didn't even bother reading the story. And I saw his front page walk, you know, like, who cares?

Pat: Yeah. That was my favorite. Just 93. Just a little heads up, I'm gonna retire before I'm 93.

Scott: Before you're 93?

Pat: Yes.

Scott: Most of us won't make it to 93. Anyway, let's take some calls here. We're talking with Michael. Michael, you're with Allworth's "Money Matters."

Michael: Yes. Hi, good morning, gentlemen, and thank you for this opportunity. I wanted to share first of all that I was by your Folsom location for a first-time, complimentary consultation about 10 years ago. And I was sitting in your lobby and Pat, you walk by, and we don't know each other and never met each other before, but you stopped to say hello to me and to thank me for visiting. And I recognized who you were, but I thought that was very kind of you as an owner to greet me. So, I'm just saying thank you 10 years later for doing so. So, thank you.

Pat: Okay. Well, we appreciate that.

Michael: Yeah. Yeah. So, my question, I think, is actually pretty straightforward, but I struggle over it. My wife and I, we're about 65 years old and we've had our long-term care insurance policy for about 20 years now. So, we bought it when we were in our mid-40s. And it has a reduced paid-up benefit, and I'm quite sure that we can self-insure today. But the annual premium, I believe, is still quite attractive. And I'm trying to figure out, should I just continue paying that annual premium as it's cheap or let the policy lapse, self-insure, and bank on the paid-up benefits?

Pat: That is a great question.

Scott: What are the paid-up benefits?

Michael: So, the paid-up benefits for each of us is approximately about $18,000.

Scott: Which means what?

Pat: Yeah. I don't quite understand what that means.

Michael: So, the paid-up benefits is, if I let my policy lapse, then I still have benefits up to about $18,000 each to accrue to be used if we have some type of event.

Pat: So, does it carry a cash value in it?

Michael: Right.

Pat: Okay. So, it's a life insurance policy.

Michael: Well, they call it a paid-up benefit, is what they call it, a reduced paid-up benefit on the policy.

Pat: Okay.

Scott: This is a 20-year-old policy, Pat.

Michael: Yeah.

Pat: That's right. Okay.

Scott: They don't write policies today like they did 20 years ago.

Pat: And what are your premium payments?

Michael: So, the premium payment for both of us is about $2,000 a year.

Scott: And what's the benefit?

Michael: So, the daily maximum benefit is about $280 a day. And then the lifetime maximum benefit is about half a million for each of us.

Scott: So, your premiums are $2,000 a year.

Michael: Right.

Pat: And the lifetime benefit is $500,000.

Scott: What's the waiting period?

Michael: About 90 days.

Pat: And what's your net worth?

Scott: And is this a typical long-term care policy that you have to go into a home? Is there any benefits for...

Michael: No. Yeah, you can go to your own home and have nurses visit you or go to a home or whatever.

Scott: Without even asking...

Pat: Oh, my gosh.

Scott: ...the rest of your assets, there's no way I would cancel this thing.

Pat: Yeah, this thing is cheap, cheap, cheap. I can't believe it's this inexpensive.

Michael: Yeah. And that's why I struggle over it because I feel very confident I can self-insure.

Scott: Yeah, but it doesn't matter.

Pat: Yeah. I mean, life insurance is so cheap.

Michael: But it's so cheap I don't think...

Pat: Yeah. I can't believe it's this inexpensive. And have they raised the premium at all?

Michael: It's every, what, two or three years that they have an option to reset the premium. And if they do, it's like about 2% increase that I've seen over the years.

Pat: Is this a group plan?

Michael: Yeah. It's with the old telcos in California.

Pat: Okay. All right. So, your claims experience on this group, it must be unbelievably good.

Michael: Again, I don't know. So, that's just what I know in terms of what I'm paying, what's available, but I feel confident I can self-insure, but I'm saying it's cheap, but...

Scott: Actually, I'll buy the policy from you and pay the $2 grand a year and collect the benefits. I mean, this is the kind of thing where just the policy has economic value.

Pat: Yeah. In and of whether you need it or not.

Scott: Not that there's necessarily a market for something but you would not wanna cancel this.

Pat: Yes. I can't believe it's this inexpensive.

Scott: I know. I mean, you got up to $500,000 each, so it's up to $1 million in benefits.

Michael: Well, that's lifetime maximum benefits is what it shows.

Pat: Yeah. But, by the way, we answered this today, but it wouldn't surprise me if four years from now this premium payment went up to $6 grand a year.

Scott: There might be some limits on how much it can go up.

Michael: There are caps, yeah.

Pat: Yeah. That's what...

Scott: See, they were...

Pat: This is why they quit issuing these policies.

Scott: There's less than 10% of long-term care policies issued today than there was 15 years ago.

Pat: And it's because they underwrote them improperly.

Michael: Okay.

Pat: Yeah. And you're the beneficiary of that.

Scott: Yeah. I would never cancel this.

Michael: Yeah. Because I was leaning towards canceling it because, again, I feel confident I can self-insure, but...

Scott: It doesn't matter. It's too cheap.

Pat: Yep.

Michael: Okay.

Pat: Nope, nope, nope. It's cheap.

Scott: It's too cheap. And the odds are you and your spouse will need some sort of care, maybe it's in-home or maybe somewhere else, at some point in your life, right? That's the statistical odds. And because the premiums are so low compared to the benefits, even though you can self-insure, I would keep this policy.

Michael: Okay. All right. I appreciate it.

Pat: All right.

Scott: Thanks, Michael.

Michael: Thanks, gentlemen.

Pat: Thanks for the call.

Scott: Yeah. Maybe we'll hear from him another 10 years. I guess he visited one of our advisors 10 years ago.

Pat: Yes. That's astounding how inexpensive that is. No wonder they quit writing these things. No wonder all the insurance companies...they underwrote them poorly.

Scott: And you look at the leaders of the insurance companies are going, "How much are we gonna lose on long-term care this year?"

Pat: That's what they're saying.

Scott: Yeah. Because they're losing money on it. And every insurance company is losing money on long-term care.

Pat: And there's two components of it. One was, when you think about this thing was written 20 years ago, what were the interest rates 20 years ago?

Scott: A little higher than they were today. The same ballpark.

Pat: Yeah.

Scott: Maybe a little higher than they were today.

Pat: But for all those years, they take that money and they set it aside. And what do they normally buy? They buy mostly bonds. So, the asset wasn't producing much, and then they underwrote...

Scott: Because the interest rates had been so low the last 15 years.

Pat: That's right.

Scott: Yeah.

Pat: And then they underwrote it.

Scott: Yeah. That's why it's so hard to get long-term care insurance.

Pat: Which, the mistake they made is they were life insurance people that started writing long-term care for...And there's a difference between morbidity and mortality. It's just the same thing that happened to disability policies. Correct?

Scott: Yeah. Anyway, let's go to Florida and we're talking with David. David, you're with Allworth's "Money Matters."

David: Yeah. Hi, Scott and Pat. How are you doing?

Scott: We're good.

David: Good. I have a question. My wife and I, we're 67, been retired for about 5 years. And part of our assets, we have about $800,000 in corporate bonds, individual bonds, and about $700,000 in corporate bond funds. Excuse me. And the bond funds are probably down about 11%, 12% the last couple of years. And I was wondering if I should cash in the bond funds and buy individual bonds.

Scott: What type of bonds do you own, these individual bonds?

David: There are a lot of bank, Canadian banks, there's...I'd have to look them up. I don't really have 'em...

Scott: My guess is the risk level in your individual bonds is dramatically greater than the risk level in your bond funds.

Pat: Well, and I have a question, which is, how did you decide to structure it this way?

David: Well, they were all individual bonds, and then a couple of years ago, they started getting called and the corporate...the bond funds were paying more than the individual bonds.

Pat: So, originally, your thesis was individual bonds versus bond funds.

David: Yeah.

Pat: And what was the reasoning behind that thesis?

David: Just that, you know, at the end, when they matured, they still get your value out of them.

Scott: If they...

Pat: If they mature.

Scott: If they mature.

David: Yeah.

Scott: So, like, my basic rule of thumb on this is unless somebody has $20 million or more in fixed income to really build a diversified portfolio of individual bonds, I think people are crazy to own individual bonds unless they are U.S. government bonds or some muni bonds that are highly rated because all it takes is one of the issuers to struggle and not be able to make their payments. And it happens all the time. You see AAA-rated or AA-rated bonds, corporate bonds...And here's my personal experience. So, I have a client, I remember his face, right? I can think of his face. This is the financial crisis back in 2007 or 2008 when Ford Motor Company was taken over by the federal government. We had a bond ladder he had built for himself. Ford Motor Company maybe comprised 10...

Pat: We built it for...

Scott: Correct. That is correct.

Pat: We did it. We did it.

Scott: Well, he asked for it.

Pat: Okay. Because he felt that it was more secure, you could watch it, you could feel better about it.

Scott: He told me, "Scott, I've got an MBA. You don't understand. I know this stuff better than most people." And frankly, I probably shouldn't have...

Pat: You should have fought with him?

Scott: I probably should have fought with him a little more.

Pat: Well, you were a young advisor.

Scott: Nah, I wasn't young back then. I was still...I'd been doing this a long time. We hadn't experienced a financial crisis like this.

Pat: Okay.

Scott: And so when you've got Ford Motor Company that the government takes over, they wiped out their bondholders. So, his bond position went to zero.

Pat: In that holding?

Scott: It was about 15% of his bond holding.

Pat: So, the rest of the portfolio didn't mean a thing?

Scott: Correct. I mean, the bonds are supposed to be there for the more conservative piece of your portfolio.

Pat: And didn't we see the same thing with Pacific Gas & Electric, Enron?

Scott: There's lots of situations where good quality companies, good quality bonds, they become with zero. So, like, I would not recommend...Well, if you're asking our opinion, our opinion would be to get rid of the individual bonds you have...

Pat: Right now.

Scott: ...and buy more bond funds.

Pat: Right now.

Scott: And diversify your fixed income portfolio so you've got a variety of different types of bond funds.

Pat: And there's no reason to wait for them to mature.

David: Okay. So, you...

Pat: We're just talking about a larger number. That's all we're talking about. If you look...

Scott: And managed. And you got a whole team that's paying attention to these things.

Pat: And someone...

Scott: Someone's actually on the research calls.

Pat: That's gonna help some.

Scott: Yeah, right. It'll help some.

Pat: It'll help some. It's not gonna stop the thing that arises out of nowhere. But the thing that arises out of nowhere, like the Ford Motor Company, will only be like 0.5% of the portfolio versus 15%.

Scott: Correct. That's exactly right. It might have been higher than that. I forget what it was. I just remember the pain that we both went through when Ford...

Pat: What's the downside of owning the...?

Scott: It's a little bit more expensive.

Pat: It can be.

Scott: I don't think it's more expensive. The downside, there's no immaturity date on it. But that's all in your mind really. Because just because you wait until the maturity date doesn't mean that the thing doesn't have an actual value today.

Pat: That's right. But a bond fund has an average maturity in it.

Scott: That's right. And you can manage to that, and duration.

Pat: Obviously, we feel strongly about this. Yeah.

David: Okay.

Scott: All right, David. You asked for our opinion, so that's our opinion on it.

Pat: Any other questions for us?

David: Yeah, I have a quick one if you have time.

Scott: Yes, sir.

Pat: Sure.

David: I gave a deferred variable annuity. It's worth $170,000 now. The cost basis was $25,000. And I'm not really sure what to do with it.

Scott: Damn. And this is not in an IRA, I'm assuming, it's a non-qualified deferred annuity?

David: Yeah.

Pat: How long have you owned it?

David: Probably 35 years.

Scott: Yeah. Well, you said probably 35 because it was 1986. There's a change in that. Could it have been before 1986?

David: No. It was after.

Scott: Okay. The challenge is, of course, all that gain is gonna be taxed as ordinary income, either to you or your heirs.

Pat: Can you gift this to a charity?

Scott: They could be the beneficiary on it.

Pat: And not pay taxes.

Scott: Yeah, they could be the beneficiary on it.

Pat: That's the only way you're gonna get around.

Scott: How old is...

David: If my wife got it, would she pay tax or just to the...?

Scott: Yeah, there's no stepped-up basis on these things.

Pat: Which is one of the problems with these non-qualified variable annuities versus an S&P 500.

Scott: Or any non-qualified annuity. Indexed annuity, same thing.

Pat: That's right. Outside of an IRA, non-qualified.

Scott: Yeah. I would keep it.

David: Okay.

Scott: I mean, I'm assuming it's a decent annuity, but there are some lower-cost ones there.

Pat: Well, I don't know. I don't know. Who are the beneficiaries on that?

David: Half is my wife and a quarter is both my children.

Pat: And do your children make more money than you, income?

David: Probably not.

Pat: Okay. I'd keep it.

Scott: Yeah, I'd keep it. I don't know if it's a good policy or not a good policy. There are some lower-cost annuities out there that you could do a tax-free exchange into a newer one, but it may or may not make sense.

David: All right. But would you suggest annuitizing it or just...?

Pat: Well, do you need the money?

David: Not really. I could use the money, but it's not...

Pat: What's your overall net worth?

David: Probably $8.5 million.

Pat: And how old are you?

David: Sixty-seven.

Pat: And if you actually have the money...

Scott: If there's a dollar I was gonna give to charity on my death, it would be this annuity.

David: Okay.

Scott: Because it's the least tax-efficient...I mean, any IRAs or 401(k)s essentially have this similar kind of tax problem...

Pat: That's right.

Scott: ...but...

Pat: No. But Scott, he answered the question. I asked, "Do you need the money?" He said, "No, but I could use it." Is that what you said?

David: Yeah. If I annuitized it, it would probably be a thousand a month.

Pat: Would you spend it? Would your life change at all? Would you go on more vacations?

David: No.

Pat: What would you do with the money if it came in?

David: I don't know. Pay some bills.

Scott: What's your ballpark family annual income?

David: What, with the dividends and...?

Pat: Yeah, everything. Everything.

Scott: Yeah, yeah, yeah. And your tax return.

David: Well, the dividends not from the IRA?

Pat: Everything. Everything.

Scott: So, here's the challenge.

Pat: You're not gonna spend any money.

Scott: Well, you're asking us to answer a question that without knowing all the other things, what's going on in your overall finance?

Pat: Is it $200,000? How much money comes through the checkbook?

Scott: Well, that's a different question. What's your taxable income?

David: It's probably about $180,000, $200,000. I don't know.

Pat: My answer is you should spend more money. But I wouldn't necessarily...

Scott: But your children are in a lower tax bracket than that?

David: One makes probably about $200,000 and I'm not sure what the other one makes. They don't ask me for money, so I'm sure they do well.

Pat: That's the barometer.

Scott: I mean, look, without knowing everything in your portfolio and what's going on with your entire finances without a complete financial plan, it's hard to make a judgment on what's best to do with this annuity. My guess is telling me probably just wait and continue to defer it.

David: Okay.

Scott: All right. Thanks, Dave. I appreciate the call.

Pat: I appreciate the call.

David: All right. Thanks for [crosstalk 00:21:04.248]

Scott: It's interesting, Pat, the tax laws have changed over the years. And 30 years ago, buying an invariable annuity probably made some sense at the time. Income tax rates were much higher, capital gain tax rates were higher back then. And why bother with...Let's just have this variable annuity. The challenge is today, of course, one, capital gain rates are much lower. She'd be better off owning, let's say, an S&P 500 index fund outside of an annuity because if you put in $100,000 goes to $200,000, that gain is gonna be taxed as a capital gain.

Pat: That's right. But in this situation...

Scott: And there's no stepped-up basis upon death...

Pat: It makes no sense now.

Scott: ...with annuities.

Pat: Yeah. But you know what his problem is, and we never even talked about it, is the repeal of the estate taxes in, what is it, 2025?

Scott: Well, he's still got 11 million bucks or so, $11 million, $12 million.

Pat: He's 67. I mean, he's...

Scott: Well, it could be a problem. We're barring trouble today if we're worrying in 2023 what may or may not happen in 2027.

Pat: I would think about it.

Scott: Well, think about it. What planning would you do today?

Pat: I don't know. I talked to an estate planning attorney and he said they're bracing for an onslaught of business when this thing gets repealed. You think it's gonna happen?

Scott: It's not repealing, it's sunsetting, right?

Pat: Okay. That's right.

Scott: Part of the other tax packages.

Pat: That's right.

Scott: And part of it's gonna be to...I think we'll find out more next November, at election time, of who's gonna be in...

Pat: Do you know...

Scott: Which guy they're gonna wheel down the aisle?

Pat: Oh, no. Oh. Oh. Can't we do better than this, we as a country?

Scott: It's hilarious.

Pat: Can't we do just a little better?

Scott: It's a bizarre thing. And I actually enjoy talking politics with friends and stuff. And we're not gonna do it much in this program because...

Pat: I think most of America could agree...

Scott: On that one. Yeah.

Pat: ...on that one. I don't think we have to go too far one way or the other. Everyone's staring at each other, like, "Why don't you run?" Anyway, let's go to the calls.

Scott: And let's talk now with Larry in California. Larry, you're with Allworth's "Money Matters."

Larry: Hi, how are you guys doing today?

Scott: We are fantastic.

Larry: So, I think in some respects, my questions were kind of simple, but a question popped in my head just recently. Back in 2018, my wife and I redid our financial plan based on my projected retirement date as she's already at her full retirement date. And I wanna retire at 62. So, we redid our plan back in 2018, and then COVID came around. And my wife and I, our income has stayed pretty much exactly the same for about the last 10 years because any time one of us has gotten a pay raise or increased our pay, we shoveled it off to our 401s to keep our income consistent. So, we were used to spending a certain amount of money. And then COVID came around and cut our income by about a third, so we decided to do a...let's see if we can survive on Social Security. So, we reduced our income down to what I projected we would get out of Social Security. And we did that for two years and we actually got along just fine. Even though we were both still working, we were still able to pay our bills. So, that created a secondary question in my mind...

Scott: So, just for clarity, you said, let's just bring our amount of income we're gonna live off equivalent to what we would receive in Social Security at our normal retirement age.

Pat: And how much was that number?

Larry: It was about $4,000 a month.

Pat: Okay.

Larry: Okay. And that started me thinking because when I'm trying to figure for our distributions and withdrawals out of our retirement accounts, what number is it that you're trying to replace as far as income is concerned because everybody's got a different opinion...

Scott: That's a great question.

Larry: ...on what level of income are you trying to replace?

Scott: That's a great question.

Pat: You know what? So, I actually was thinking about this yesterday. And when Scott and I first started doing this 30-plus years ago, we would have people...Do you remember this, Scott?

Scott: Yeah, yeah. [crosstalk 00:25:44.720] budget.

Pat: We would have them prepare a budget.

Scott: Write all your expenses down.

Pat: Write all your expenses down. And then I still remember sitting with people and they're like, "Oh, we live on $2,100 a month." And then I'm like...

Scott: This is a long time ago.

Pat: Yeah. But then you're like, "But there's $4,500 a month as your take-home pay."

Scott: "Where's the rest going?"

Pat: "Where's the rest?"

Scott: "I don't know."

Pat: "I don't know. I don't know." So, actually, we quit doing that a year into financial planning and we base everything exactly like you're doing today, which is what are you living on? Right?

Scott: That's kind of baseline.

Pat: That's baseline.

Scott: Now, you and your wife really tightened the belt to say, "Hey, can we live on much less?" And you realized you could.

Pat: Which is highly unusual, by the way.

Scott: Very unusual. I mean, like, Larry, there's been some people I've talked to that say, "Tell me, Scott, I'm not gonna retire unless I could be assured that my income is gonna be even slightly higher than it is today. I'll just assume keep working until I can be assured my income slightly higher today." I've had others say, "Scott, I hate my job. I'm happy to live on less. How much can I...if I retired today, what can I live on?" They're like, "Fine, I'm retired."

Pat: And there's other people when you say, "Well, why don't you retire, but think about going back to work and see how you feel?" Right? That is not unusual. So, your question to us is what number do you peg yourself to?

Scott: Because sometimes you say, "Oh, it's 70% of your pre-retirement income or 80% of your pre-retirement income or 110% of your pre-retirement income."

Pat: But it doesn't matter if my mortgage is paid off, then all of a sudden, and I'm not paying into Social Security and...So, how much money do you actually have saved for retirement?

Larry: We have right now about $670,000 in 3 different retirement accounts. And I'd say that's...When we were trying to figure out what we were going to do is based on the number, I didn't figure that our gross income would be what I wanted to base the number off of. Is money not going out the same as money not going in? We've also been saving 30% of our income from both my wife and myself. So, am I going by AGI number or am I going by money goes into the bank?

Scott: What's your gross income between the two of you, your wage income?

Larry: About $110,000 between the 2 of us.

Scott: Okay. And you've got 30% going into...you're saving 31% of that off the bat, right?

Pat: Right?

Larry: Our taxable income for the last 8 to 10 years has averaged between $71,000 and $75,000 a year. And it's been consistent every single year because I use our 401s...or my wife's IRA. She has a 401 too, but she also has an IRA rollover. I've been using that as the mechanism for making sure that our income stays equal. So, we're trained on how much money we have to spend. We're so ingrained into that habit...

Scott: That's right.

Larry: ...by the time we come to retirement that if our income changes just a little bit, we're not even gonna notice it.

Pat: Will either of you receive a pension?

Larry: No.

Pat: Okay.

Larry: All we have is two 401s and her IRA.

Pat: And the home is paid for?

Larry: No, the home, we still owe about $50,000 on and the mortgage payment is only at $960 a month.

Pat: And the interest rate is probably in the...

Scott: Oh, when's that gonna be paid off?

Larry: The home is scheduled to be paid off in 2031, I believe. And the interest rate is 3.5%.

Scott: I mean, one concept is to earmark a little cash. It's like, set aside, let's call it $70 grand from out of your retirement account. Let's say you retired today. This is how I would structure. Let's take out $70 grand or whatever we need so that we can have a check sent out of that one account for $960 and have it designed so that account will be depleted on the day that your mortgage is paid off. So, that way we can essentially say, let's...because you've got a major expense that's going to end in 8 years and it's $12,000 a year. So, we don't need to calculate that into your plan for the rest of your life, right? I mean, that's kind of how I would think about it. So, then I'd think, now you've got $600,000 of retirement savings. Think of, say, a 4% withdrawal rule. That's $24,000 a year.

Pat: But he's not gonna need that much.

Scott: And you won't have a mortgage payment because...

Pat: Yeah. But he won't need that much. He's living on $50 grand now.

Scott: Yeah. So, what's your question?

Larry: Well, when I was trying to figure out what benchmark I wanted to use for making sure that my wife and I are in some states relatively stable...

Scott: Here's the takeaway I want you to have from this call. Your retirement accounts can do two things for you, one is we can carve off a little bit to make that mortgage payment so you no longer have to worry about the mortgage payment. And then for the remainder of that retirement account, it'll generate about $2,000 a month and grow each year to offset inflation. So, you can add that to your Social Security. That gives you a ballpark of where you could be retirement.

Pat: But I wouldn't even go that far, Scott. I would actually...I agree with what...

Scott: You don't like my takeaway?

Pat: No, no, no. I agree with what you said about the mortgage. And then I'd start a distribution of $1,000 a month.

Scott: Out of what?

Pat: Out of the IRA when he retires.

Scott: Well, he might need more than that.

Pat: He doesn't. He's been living on $50 grand a year.

Scott: I want more than that.

Pat: That's right. The truth lives somewhere between what you said and what I said.

Scott: But I mean, bottom line is you can...Larry, if you said I was retired today...

Pat: You'd be fine. Yeah.

Scott: Based on your income needs. And if you told me you wanted to start traveling to Europe every other month, then it's a different story.

Larry: Well, see, therein lies part of the problem with my plan also is my wife and I have a camping membership. We like to go out in our RV. My plan, as it's written today, is I want to retire at 62 because we still wanna be able to go do things while my wife is still healthy enough to be able to do it. Now, I turn 62 in July of next year, but I'm going to wait until December because I wanna use that extra couple of months to offset any taxes that we're gonna have towards the end of the year, but we'd like to sell our house and buy something smaller and just pay off that mortgage.

Scott: You need to update your financial plan.

Pat: And by the way, the thing you should be worried about is the cost of medical insurance.

Larry: I thought about that too is what I would like to do is, you know, based on what I projected the cost of the medical insurance being is to work two days a week, kind of semi-retired, and make just enough money to offset the cost of the insurance.

Pat: Well, I don't know if that's gonna work or not, but that's what you should worry about. If I was doing a financial plan...

Scott: Yeah, of course. The Medicare.

Pat: If I was a financial advisor, that's the thing I would be focusing on.

Scott: Larry, it makes sense for you to update your financial plan. And when you said you had your financial plan and something about a written financial plan, I mean...

Pat: Who wrote it?

Scott: Well, like, whatever is written five years ago is almost irrelevant today. I mean, things change so dramatically. And in today's world, a financial plan is dynamic, it's ongoing, it changes and it doesn't really...I mean, I don't know.

Pat: Well, who wrote the plan?

Larry: Well, that's kind of a two-tiered...Our plan, the intention is to update it next year.

Pat: I understand, but why wait?

Larry: Initially, I did the financial plan and then I actually went to an advisor who in 2018, just before my wife had a major operation, and we did one through them. And to me, shockingly enough, they were really comparable. But at the time, you know, because we're both still working, we couldn't roll the money out of our 401 and into an advisory.

Scott: There's a lot of ways you can do what-if scenarios, Larry, and I think that would be helpful for you because financial planning today isn't really, "Let's get a bunch of information. Let's print out this three-ring binder and it's a static thing, etc."

Pat: It's very dynamic.

Scott: It's dynamic. And it lives in a software program.

Pat: Our advisors have big screens in the office where the clients sit and they do what-ifs with the clients. Well, what happens if I worked another year? What happens if insurance premiums were $2,000 a month? Which isn't an...

Scott: Nope.

Pat: It's not unusual. Medical? You just said your wife had a major operation. If she's got pre-existing, I mean...

Scott: Yeah, that's what...

Larry: She'll be on Medicare next year. She's still working. At the moment, she's still working because she didn't wanna retire until I did unless her health forced her out.

Pat: Got it.

Scott: But Larry, I mean, I...

Larry: So, she'll be full retirement age in February.

Scott: I like the way you're thinking because it's like it sounded...One takeaway I got from this is you don't know if your wife's health is gonna be good for many, many more years or a shorter period of time and you wanna be able to spend some time with her now, which I think is a very worthwhile goal and something to pursue. I think doing some more in-depth planning, some what-if scenarios, it might say, "Hey, let's retire today and go do those things that you wanna do with your spouse."

Pat: That's right.

Scott: It might say, let's wait until the end of next year or might be somewhere in the middle. But doing that kind of plan and going through those what-if scenarios, then you can make an informed decision. And of course, there's assumptions. We obviously need to make all kinds of assumptions there.

Pat: And I think if he's in an RV, what happens if gas goes to $7 a gallon? He's only gonna camp 14 minutes from his house. Right?

Scott: I always think it's funny when you see these campgrounds right next to a freeway. I'm thinking of all places to camp, don't you wanna kind of get out and...

Pat: I thought about that.

Scott: What do you mean you thought about that?

Pat: Because there's one right on the way to Lake Tahoe from here. And I asked a friend that stays there.

Scott: He stays there?

Pat: Like, he's from out of town. He's from out of town, comes to visit. He says it's because it's close to his children and his grandchildren's house and that's why he stays there. It has nothing to do with the nature. It just happens to be close. But then I had this discussion with my wife. We have a friend that has an RV and they were going someplace. And I said, "Do you know, they're going for three days. It may be cheaper to eat out and stay in a hotel than to drive an RV because of the cost of gas."

Scott: Well, look, a lot of these RVs do not make a lot of economic sense. You gotta really want to have that lifestyle. When you pencil it out, particularly in today's rates, when interest rates are much higher, there's one thing when your cash assets earn nothing. When they can earn something today, a decent return, I mean, you take $100 grand or $200 grand or $500 grand or a million or whatever these things go...

Pat: When it was earning zero it didn't really matter. But when it can earn 4% or 5%...

Scott: If you've got the cash and you can afford it and you enjoy it, great.

Pat: Have you ever owned an RV?

Scott: No, I have no desire to.

Pat: I owned one for three, four years.

Scott: I borrowed it, your trailer, your fifth wheel thing, whatever it was.

Pat: Yeah, it was a toy hauler. You borrowed it?

Scott: I did borrow it.

Pat: Where'd you go?

Scott: Thrashed it.

Pat: No. Where did you go?

Scott: I used it for a 24-hour mountain bike race. Slept in it. It was fantastic.

Pat: I lent it to a friend that went to Burning Man in Nevada.

Scott: With that?

Pat: That was a bad idea for me to lend that.

Scott: He didn't bring it back detailed and cleaned it.

Pat: He tried, but it was in a sandstorm.

Scott: We had it for three. We gotta go one more. Take a call here. You had sandstorm.

Pat: It was in a sandstorm. There's sand everywhere.

Scott: Look, we live in Northern California. When Burning Man happened, you see all kinds of strange-looking...RVs not really the term for them. I don't know what some of these vans are. They're so brown from all the dust.

Pat: Well, in this year because it rained up there and it was all flooded in. It was mud everywhere. You watch them. And by the way, I have flown out of Reno Airport two years in a row, either at the beginning or the end of Burning Man.

Scott: That's as close as you wanna get to Burning Man?

Pat: I tell you what, they're some of the richest hippies I've ever met on that plane. I sat next to the guy that...

Scott: They're not real hippies.

Pat: ...flew from Germany. He flew from Germany to go to Burning Man.

Scott: On business class.

Pat: In business class.

Scott: All right.

Pat: He dressed like a complete dirtbag. And I'm like, "You're rich as heck." Anyway, it was interesting.

Scott: I don't quite understand though. Wait, I don't wanna talk about Burning Man.

Pat: All right.

Scott: Sure there's someone listening that's like, "I love Burning Man. I've gone every year."

Pat: Oh, I know. I know.

Scott: "Getting stuck in the mud was fun."

Pat: It was fun.

Scott: I don't know. To me, it doesn't sound...

Pat: Whatever you're into.

Scott: Or RV next to the freeway.

Pat: Whatever you're into. It's your life.

Scott: I think the point on the RV stuff, we've both have seen a number of people, they retire and buy an RV. And sometimes very expensive ones.

Pat: Yes. What do you tell them before they...?

Scott: Go rent one.

Pat: Go rent one for a month.

Scott: I don't care what it costs you to rent.

Pat: Rent it for a month.

Scott: Make sure you really enjoy this. And, look, I can think of some clients that...I think one client, they lived in their RV six, seven years. They traveled everywhere on their RV. They loved it.

Pat: Loved it. I have clients that loved it. I had clients that couldn't wait to get rid of them. Yeah. They bought a brand new one, quarter of a million dollars. It was a quarter-million-dollar RV. They went out for six weeks. They came back, I remember they're like, "We cannot spend that much time together." The husband and wife. They're like, "It's..."

Scott: In addition to the sales tax that they had to pay on the RV. And then the depreciation, you drive it off a lot. I'm assuming it's like a car. If it's driven off the lot it didn't have the same value.

Pat: Yes. Yes.

Scott: Anyway, let's go back to the calls. We're in Seattle talking with Joe. Joe, you're with Allworth's "Money Matters."

Joe: Hi, thanks for taking my call. So, here's the situation. I live in Seattle and about six weeks ago, I sold my house and moved into an apartment. So, I have a small business that I run. And right now that business just about meets my current level of expenses. That could change next year, but I have about $400,000 in an IRA for retirement. I'm only 44. I have no debt except for $15,000 in student loans at about 3%. Like I said, my car, I own it free and clear. I've got no credit card debt.

Pat: Why did you sell your house?

Scott: Yeah. What was the thinking behind that?

Joe: Well, that's a long and tragic story, probably for a different podcast. But needless to say, my partner and I decided to go our separate ways, so we had to sell the house. And he was making most of the money. So, I had moved several times to help further his career. He works for a very large company here in Seattle. And he decided to end the relationship, and so we sold the house and went our separate ways. And that was...

Pat: All right. Got it. Sorry to hear that.

Joe: Well, I am too, but, you know, now we have to figure out what to do with my current financial situation. So, what I have is I have $200,000 in cash from the sale of the house. It's all mine. I don't owe any taxes on it or anything. And right now I have it parked in a savings account earning 5.5%. And I'm just thinking, is that the right thing to be doing with it? Should I be...What should I be doing with this point?

Scott: Do you think you'll buy another residence at some point, whether it's a condo?

Joe: No. ell, I've signed a lease that runs through October of '24. So, I have another 12 months, 13 months in the current apartment that I'm in.

Pat: And how stable is the small business you run?

Joe: That's the problem. So, my business consists of two pieces. There's an online component and there's a face-to-face component. The online component, which comprises about half of the income I get from this business every month could be taken away from me virtually at any time. I have a very strange business. It's probably one that you've never heard of before, but I run a bridge club. Okay?

Pat: Like cards?

Joe: Yes, like cards.

Pat: Okay. Okay.

Joe: And so when the pandemic hit, I had a wonderful bridge club and it was thriving, I had lots of customers, and I was making...

Pat: It's like you and Peloton, you were just like, this pandemic was great.

Joe: Well, the pandemic hit and all the face-to-face clubs closed.

Scott: Oh.

Pat: Oh, got it.

Joe: And then...

Scott: They haven't returned the same.

Joe: ...the entity which allows us to run sanctioned games allowed us to all move online. So, all of these online bridge clubs started popping up. But the rules of how they can operate, when they can operate, and who can operate them is completely out of my control. And I've been hearing some rumblings that the league, which sanctions these games, might change the rules, and the online business that I built could be gone in the snap of a finger.

Scott: But if that happened, wouldn't those same players wanna go back somewhere in person?

Joe: Yes, but the thing is with online bridge, those players are scattered all over the country.

Pat: They're everywhere.

Joe: And so what I'm basically faced with is...

Scott: But my assumption would be that the people who used to come in person, they're doing this online in some other community.

Pat: That's right. So, you're losing business locally to someone who's online back East, which would gravitate...Assuming that the market of bridge play...

Scott: But I guess the bigger question on this...

Pat: Wait, Scott. How much do you make out of this business a year? Did you say?

Joe: Well, so, before the pandemic hit, I was making about $90,000. Now, it took me about four years to get up to that point. So, I started from scratch in Connecticut, and over 4 years, you know, I built it up to about $90,000 in profit.

Pat: Okay. And what are you making today in profit?

Joe: Well, probably about $50,000. And about half of that is from the online club and half of that is from the face-to-face club, which I run currently three days a week just because of venue availability. I'd love to be able to rent my own commercial space out here in Seattle, but the rents are way too high to justify.

Pat: I actually don't think that's a good idea.

Scott: I mean, I think the bigger question from a financial standpoint is not really what you do with the $200,000 right now. It's what do you need to do with your career so that you can be financially self-supportive? Because you had a long-term relationship, your partner earned a lot more than you did, not uncommon at all in relationships, right? And so sometimes it afforded you to...And you were making better money four years ago.

Pat: But your question to us, is that $200,000 in the right place?

Scott: I would keep it exactly there.

Pat: Absolutely in the right place.

Joe: Okay.

Scott: Because, look, here's how we view things. If there's a chance you're gonna spend the money within the next five years, you want it somewhere stable and liquid. If it's money that you know you're gonna earmark for something way out there, retirement, well, then we've got so much time we can go through market cycles and that sort of thing. But, one, we don't know. You're already concerned about your online portion. And if suddenly that was taken away tomorrow, you might need to dip into this to help.

Pat: You know what you need is you need a business coach. And I was just thinking to the name...in Sacramento, there's a coach, it's called SCORE, which is retired executives. Right? Which is you need a business...you need a...

Scott: And I think it's all pro-bono stuff, ain't it?

Pat: It's all free. Yes. Yeah. And so you...

Joe: Really?

Pat: Yes.

Scott: There's organizations like that.

Pat: And there's all over the U.S. which are retired executives. You need a sounding board because what you just said is you'd really like a full-time space for the bridge and I thought to myself, "That's dangerous as heck." What you wanna do...

Joe: Oh, yeah. Well, that's why I haven't done it.

Pat: No, I understand, but...

Joe: I mean, I could go...

Pat: ...there's tons of empty space all over the city that is used in parts of the daytime that you want.

Joe: Yeah. You know, exactly right, but, you know, I really need to have a space...like, right now I'm in one of those spaces. It's not used during the day during the week. It, you know, just sits here. And I'm free money for them.

Pat: That's right. That's right. But what you need is a sounding board because if you have 1, why can't you have 3, or 5, or 7, or 12?

Joe: Well, a bridge club is very much a cult of personality.

Pat: Nope. That's right. That is right.

Joe: So, I can only be in one place at a time. And not only am I running the business, but I'm also acting as a referee and as a teacher. So, bridge is a pretty complicated game and it requires a referee.

Pat: You could tell me all the reasons in the world why it won't work. But when I started in business 30-plus years ago, Scott Hanson and I, I believed I was the only financial advisor in the world that could give great advice. And I was so wrong. How many advisors do we have now?

Scott: A hundred and twenty-five or something like that.

Pat: Right?

Scott: There were lots of pieces of the organization...Pat, you thought I'm the best-qualified person.

Pat: And now I realize...

Scott: Nobody can really do this.

Pat: Now I realized today...

Scott: But I think that, Joe...

Pat: No, no, no. You need to focus in on that.

Scott: And it's really, I think, like, give yourself a period of time, whether it's 6 months or 12 months to focus on your business and have a period of time where it's like, if it's not generating or you don't see the clear path to generating X dollars, then you look at making a career shift.

Joe: That's exactly what I was thinking. I signed a one-year lease on my apartment, and my thought was, I'm gonna stay here in Seattle, work on this business, and if I can get it to a point where it's able to support my financial needs, then I'll stay, and if not...

Pat: Then great.

Scott: There you go.

Joe: That's what I was thinking. But again, you know, you think these things, but you wanna talk to somebody to make sure that what you're saying makes sense.

Pat: That's what I said. You need a coach.

Scott: I'm sure Seattle's got someone like that.

Pat: Yes, yes, yes. So, we appreciate the call.

Joe: And that's why I called you guys.

Scott: Well, we thank you.

Pat: Well, we appreciate the call.

Scott: Yeah, thanks, Joe.

Joe: All right. Thank you very much.

Scott: We wish you well. It's interesting, it's a...

Pat: I spoke at this high school a couple of years ago and talked about careers and different things. And the kid afterwards came up and he said, "Well, I heard that if I just follow my dreams and do something I'm passionate about, then I will be successful."

Scott: That's great.

Pat: And I said...

Scott: What if no one else is passionate about it? Then you're broke.

Pat: That's what I said. I said, "Don't believe that garbage." I was bicycle riding with a friend of mine yesterday, and he's a retired probation officer. And he said, "I absolutely had no passion."

Scott: How could you? Some of those jobs, prison guard.

Pat: Yeah. He said, "But I needed a job." He said...

Scott: I heard the interview from the guy who did the "Dirty Jobs" show, he's the producer.

Pat: Oh, yeah, Mike Rowe. Mike Rowe.

Scott: Okay. Anyway, he was just talking about he fascinated by the fact that most of these people still somehow found joy regardless of how bad their job was. The pride of their job was...Any case, oftentimes in life, we have a certain plan, we're going down a certain path, things change. Whether it's a health issue, a job like this, a relationship, a death, those sort of things. And it's that sort of time when you need to step back and refocus your financial plan. So, anyway, we are out of time. It's been great having everyone with us. If you haven't reviewed our podcast and you think it's worthwhile, please give us a review. We'd appreciate it. And we'll see you next week. This has been Scott Hanson and Pat McClain, Allworth's "Money Matters."

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