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

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

Pat: Pat McClain. Thanks for being here.

Scott: That's right. Both myself and my co-host here, both financial advisors, certified financial planner, charter financial consultant. We've been doing this program for 20, almost 30 years now as we coming into Labor Day weekend here.

Pat: Yes.

Scott: And although the markets are slightly off their high, it was amazing, I mean, how quick the recovery was.

Pat: I ran into a friend of mine and he said, "The markets are hitting all time highs," and I said, "Well, yes, the market goes up 53% of the time, they're going to hit all time highs fairly often."

Scott: That's the point.

Pat: That's the point. Right? Because if they didn't hit all time highs fairly often...

Scott: Then you'd just be living for whatever dividend may or may not be paid out by the company.

Pat: The earnings of the company. But as the dividends go up, the value of the company...as their earnings go up, the values of the company goes down. But Scott, I wanna talk a little bit about EVs. Ford Motor Company in the last couple weeks roped down a $1.9 billion investment in EVs. And you see these car companies [inaudible 00:01:52.378]...and when you write something down, it basically says, "I've invested all this money..."

Scott: And we have no chance of recouping it.

Pat: And it's gone. It's lost. It went out in wages...

Scott: So, we're letting everybody know that this investment, we're not gonna get...Because companies talk about making investments, whether it's investment by hiring a bunch of people, investments by building factories or whatnot. And they make these investments with the expectation of getting a return and when it looks like they're not gonna get the return, they say, ah.

Pat: Yeah. And so that obviously has an effect on not only the P&L, but the balance sheet because of the way accounting rules work and how you capitalize investments in your own business. But I thought...I was thinking about this. I'm like, you are a car company executive five years ago, six years ago, and you see Tesla...

Scott: Well, you know why this is.

Pat: Yeah. But you see Tesla and you think that the marketplace is going to continue to go this direction. Like...

Scott: But that's not what drove them to this.

Pat: Well, that's right. What was it?

Scott: It was government strong hand.

Pat: And not only that, incentives. I mean, you could say what you want about Elon Musk. My personal opinion of Elon I will keep to myself, but the guy is pretty brilliant about using government subsidies.

Scott: That's how he started solar and he started the cars and...

Pat: And SpaceX. He's not getting the government subsidies for X.

Scott: He's gonna get the astronauts back home, apparently.

Pat: Whatever. He might. He might.

Scott: I hope somebody does.

Pat: But so...

Scott: And your point is what?

Pat: Well, that it's kind of like Nvidia. I've been getting these phone calls from clients saying, "Hey, do we have AI? Do we have AI?" Like, that's the hottest new thing, and electric vehicles were the hottest new thing. And things will be the hottest new thing for a period of time, but the market doesn't always come to the hottest new thing. There's early adopters, right? If you're a consumer, you study a marketing, you know, curve there, you've got your early adopters, then you have your late adopters, and then the mainstream adopters, but the product's never really...

Scott: Personally, I've never been an early adopter of technology.

Pat: I'm not an early adopter of most things. I mean, most things. But until it hits the mainstream where the bulk of the consumers start consuming it, you really don't have market. The market isn't established, and so all these companies I was thinking about made bets on...

Scott: Consumers buying electric cars.

Pat: Because the government was encouraging it.

Scott: Yeah. It's not helpful though when, like in a state like California, when last summer it was hot and the governor asked people, "Could you please not charge your cars today?" So, you know the gas station's open and you know there's like 20 of them within a mile of your house...

Pat: But you can't charge at your home. So, my point being is, going back to the investment side of it, the bright and shiny, we talk about it all the time. The bright and shiny, the bright and shiny. Don't get too caught up in the bright and shiny, including AI.

Scott: Well, the question is,...you know, so we will take calls here in just a moment, but I was thinking about medical marijuana here. So, I have lots of unique friends in my life, and I don't always agree on all of our values, but we share enough other values that I enjoy them for who they are. And so I've got a good friend that he has a massive indoor grow business of marijuana, of cannabis, weed.

Pat: This is fascinating. I had no idea. A friend of yours.

Scott: He doesn't really talk to me about it because it's not...

Pat: Because you're pretty conservative.

Scott: Well, I don't use weed and, like, don't...anyway.

Pat: Mary Jane.

Scott: Huh?

Pat: Mary Jane. Grass.

Scott: Yeah. So anyway, he was telling me this years ago he was gonna get into the marijuana business. And I said, "Be careful because this is one of those hot investment topics right now and what happens, if an investment looks like there's going to be an outsized return, capital floods that investment, it becomes an oversupply and prices decrease."

Pat: Ask any winery owner in the United States, or South Africa, or Australia, or the world.

Scott: And I heard from a mutual friend that the business isn't going so good. I don't really know. But my whole point is that whether it's AI, or EV, or marijuana, or whatever it is, if there's an investment that appears like this is going to be an outsized return, oftentimes one thing...first of all, prices are sometimes already bid up on those investments to negate whatever excess return...it's already built into the price.

Pat: Yeah. People that are selling, someone's selling that, or if you're building it, the prices to assemble that are going to go up. So, and the reason I was talking about this, it was I was thinking about that, you know, the electric vehicles and then how...

Scott: Well, I personally don't like it when the government gets them. The whole CHIPS Act. I mean, Intel's had been a disaster, and they wanna push into the...they got all these billions of dollars in subsidies and yet, like, now it seems like there's a glut of a certain kind of chip, but we don't have enough of another kind of chip.

Pat: Well, that's, yeah, that strong hand of government. But don't get too excited. And by the way, so the clients that...I've had a number of them call and ask, "So, do we have AI?"

Scott: They're calling...

Pat: And I say...

Scott: I'm trying to think. You've had a couple conversations. Like, I don't think it's every week you get three or four clients that leave you a voicemail.

Pat: No, no, no, no, no, no. I don't have that many clients, but the ones I do, it comes up in a third of the conversations.

Scott: And that's because their friends are bragging about it and they wanna be able to say, "I own it too."

Pat: But they do own it. If you own the S&P 500 or the total market, you own quite a bit of it.

Scott: Or just about any other large cap U.S. stock.

Pat: You own not only AI, but you actually own the benefits of AI, so. But I just found that the Ford writing down that $1.9 billion, I'm thinking there's some CEOs that their heads are on the line because they made these strategic decisions.

Scott: Well, my quick EV story, then we're gonna talk to Stuart, Art, and you.

Pat: Do you own an EV?

Scott: No. I'm not opposed to them by any means. It's for me, it's like...so here's my experience I had in the last year. I'm at the airport, I call an Uber. It's late afternoon. I'm hoping to get home in time to take one of my kids somewhere that night, and this guy picks me up in an electric car. Great, whatever. And he says, "Oh, sorry, do you mind...I need to get a charge. Is it okay if we stop?" And I said, "Well, do you not have enough charge to get me home?" He says, "Well, it looks like it's right on the bubble here." And I said, "Oh, don't you have the ability to accept or reject a ride?" I was nice as I could be, but I just...

Pat: I'd reject it. Did you reject it?

Scott: I'm already in it. I'm going, leaving the airport. So, I'm like, "Okay, I guess." He says, "We'll just do 10 minutes," I'm like, "Okay." So, we pull off to where he is gonna get it, they're all outta order. So they're not working. So he gets back on the freeway, he starts heading back to my house, and I'm about 40 miles out from the airport. And he says, "I think we're good," and I could see on his phone how many miles and I could see in the car how many miles, and they're about the same number. And I'm thinking, "Well, this will be kind of interesting." And so I'm watching as we're getting, I said, "Hey, you sure you don't wanna try to...?" He says, "Well, no." He says, "I think we got it here. I think we're gonna be okay."

Pat: Holy smokes. I'd be filled with anxiety.

Scott: So, we're getting to my house, close to my house. I'm watching this thing getting close to zero. Literally we turn onto my street, the car dies. Completely dies. He's like, "This has never happened to me before." He waits a few moments and starts back up. He makes it to my driveway, it dies again, I'm like, "Sorry, buddy. I gotta go." I'm thinking, I wonder what happened. He said he was gonna have to call a tow truck. And so I leave a few minutes later taking my daughter somewhere, there he is on the side of the road. I come back like an hour later, he's still there. I finally went and I got him some water from my house to give him a bottle of water. He waited, I don't know, like two-and-a-half hours for a tow truck, flatbed tow truck. I don't know why I'm telling this story. It's my EV experience. And if you own an EV, look, I've nothing against them. I will probably have one one day.

Pat: I have friends that absolutely love theirs.

Scott: Oh, yeah. Yeah. It seems like everyone [crosstalk 00:11:11.217].

Pat: I just can't imagine me driving more than 50 miles and having to stop someplace for 20 minutes.

Scott: Well, I know myself pretty well.

Pat: Oh, I would just [crosstalk 00:11:20.413].

Scott: If I'm waiting, I get frustrated enough how long it takes to fill the tank.

Pat: Oh, when the kids were younger, I'm the one that they're like, "Hey, I need to go to the bathroom, Dad." I'm like, "No."

Scott: Well, you had four too. Like, I'm sure you'd stop. Thirty minutes later another one says...All right. Hey, if you wanna be part of our program, you can send an us email at questions@moneymatters.com, questions@moneymatters.com, or you can call 833-99-WORTH. We're talking with Stuart. Stuart, you're with Allworth's "Money Matters."

Stuart: Hi. Thanks for taking my question.

Scott: Yes, sir.

Stuart: I listen to your podcast all the time. You're one of the...I think might be the only show that actually take questions and that's really a good thing.

Scott: Well, thank you.

Stuart: So, I appreciate it. Thank you.

Pat: That's because we really don't have that much to talk about.

Scott: Otherwise it'd be an eight-minute podcast. What'd you do this week, Pat? Oh, that's interesting.

Pat: Nice. What can we do to help?

Stuart: So, we have kind of consolidated over time our 401(k)s, etc. into three IRA accounts. We have what's called on the brokerage places the rollover IRA, we have the traditional IRA, which is essentially after tax, it's got some basis to it, and we have Roth IRA. So [crosstalk 00:12:46.554]...

Scott: And are you retired? I'm sorry, are you retired?

Stuart: Yeah. Yeah. Yeah. We're both retired, so I'm 68, wife is 61. I'm collecting Social Security, she not yet. And so we have IRAs and we have brokerage accounts. And so for the IRAs, I was wondering, well, I've kind of did a little homework search around on the internet and stuff that the rollover in traditional the IRAs, they don't really care. That's basically, they just say, "Hey, you got a IRA," and won't care if it's rollover or traditional.

Scott: You mean the taxation is treated the same?

Stuart: Right.

Scott: That's correct. That's correct. And you mentioned, like, your cost basis in the traditional...

Pat: That's where I went.

Scott: It's really cost basis in all of your IRAs.

Pat: Yeah. So, what is your cost basis in your traditional?

Stuart: So, let's see. The traditional, may I just give some figures or...?

Scott: Sure.

Pat: Yeah.

Stuart: Yeah. So the rollover...in mine, the rollover is $600,000, traditional $100,000, and the Roth is $300,000.

Scott: You got a lot in Roth, relative. Yeah.

Pat: Yeah. And what's your basis in the traditional?

Stuart: My guess is it's around $75,000.

Pat: Is your basis. And did you convert some of your...

Stuart: Yeah, yeah. We've done some Roth convergence in the past, mostly on mine because I'm 68.

Scott: And is this traditional in your name or your wife's?

Stuart: No. The figures I just gave you are mine. So for hers it's $700,000 in rollover, $200,000 in traditional, and $100,000 in Roth. So, her Roth is lower [crosstalk 00:14:39.216].

Scott: And does she have a big cost basis in her traditional as well?

Stuart: Roughly. It's probably half of that. I didn't write down. I'm just kind of going from memory here, so it's probably $100,000.

Scott: And she's still employed, is that correct?

Stuart: No, no. We're both retired.

Pat: Okay. All right. So, this brings up a couple really interesting questions that we have for you, but what's your question for us?

Scott: That's right.

Stuart: Yeah. My question is I was just trying to simplify stuff. You know, we've just gone through...we're retired, getting older, I want things simple. I would just like to push those rollovers into the traditional just, you know, transfer or combine or whatever it'd be called so I just have two accounts to worry about, traditional and Roth. And from what I've read on searching around the internet, the IRS doesn't care about that for tax purposes when you do the Roth conversion, they just say total IRAs and they don't care.

Scott: That's correct.

Stuart: So then it really shouldn't matter for me for our purposes if I did that, you know, just combine those two accounts.

Pat: Well, there is a difference between the two, right? If a rollover...and this is relatively recent, like in the last 10 years. Well, relatively recent for an old guy, right? For an old guy. Is that that rollover actually is protected from bankruptcy.

Scott: And outside creditors, not just bankruptcy.

Pat: And outside creditors.

Scott: Yeah. Up to what, a million bucks.

Pat: $1.5 million.

Scott: It's $1.5 million now. Okay.

Pat: Yeah. $1.5 million and some change. So...

Scott: But your own contributions are not.

Pat: But your own contributions are not.

Scott: So, worst case, I mean, like this is about the same chance of a meteor hitting your house, perhaps.

Pat: That's right.

Scott: You put these things...you combine them together, you end up in...something bad happens, someone sues you, they go after all your assets, and frankly, you would have to back out and say, "Here's the portion of this IRA that..." They would have to try to make the argument that this is now subject to creditors because it's commingled. You'd make the argument and say, "No. The vast majority came from the rollover so it still should be protected and..."

Pat: So, that's the downside. So, I assume you have an umbrella liability policy that's fairly large?

Stuart: Yes.

Scott: I'd combine them together.

Pat: I'd combine them. I'd combine, yeah, just to ease.

Scott: Now, if you were still employed or your wife were still employed, I would make the argument to put that back into the...move the rollover to the 401(k) again, or 403(b), whatever plan you had available to you, and then convert that traditional. Or maybe even take some additional money from the traditional and move it to that 401(k) so that you can convert your cost basis and do a Roth conversion that...

Pat: But that ship has sailed. When you converted the...right?

Scott: Unless you wanna go back to work.

Stuart: Well, no. That's right. So, I learned that after I did it. After we rolled the 401(k) over, I was thinking...and, you know, I actually had an advisor and I said, you know what, about this pro rata rule, should I do the conversion before I roll the 401(k) over?" And he said, "No, no, no, no." So then after the fact, I said, ah, okay, well...

Pat: Well, they were wrong.

Stuart: Yeah, I know that. I know that now.

Pat: They were wrong.

Scott: Or they were unethical.

Pat: Because it would take many years.

Scott: Even with fee-based advisors, there are conflicts of interest. So, one conflict is if you kept your 401(k) where it was, the advisor most likely wasn't getting compensated to manage those dollars. If the 401(k) got rolled over to an IRA, they can start receiving compensation for managing those dollars. So, that right there presents a conflict of interest, clearly, right? Now, maybe the advisor didn't really know or appreciate the great rollover, I mean, the conversion opportunity you had in front of you. You're a very unique situation with this high of cost basis in your IRAs, so which meant many years you made non-deductible contributions to your IRAs, for many years, which is unusual. But it created a great planning opportunity that was [crosstalk 00:19:08.157].

Pat: Yeah, especially probably in the first year or two that you retired. So, when you did convert from the traditional to the Roth IRA, you did take into account your cost basis and you did it on a pro rata basis, I assume?

Stuart: Right. Yeah. Yeah. Yeah, I mean, it's really diluted as far as you get more conversion for a given tax dollar if you [crosstalk 00:19:29.216].

Scott: Yeah. Yeah. Yeah. I mean, they're a perfect scenario for it.

Pat: That's right. I mean, I convert my traditional IRAs the day after I convert them. I make the deposit and the day after I convert them to a Roth. So, that's funny because Scott and I, when you were going through the numbers, we went to the same place with this without even...

Scott: Well, it's such a unique planning opportunity. I mean, it's not...It's pretty unique.

Pat: It is a unique...I mean, it's pretty unique.

Scott: And we've seen it plenty of times over the years, but it's still unique.

Pat: So, but I don't see any reason that you wouldn't convert the rollovers and the traditional together. It's the bankruptcy and the creditors going after you, but the assumption is, I'm guessing, your mortgage is either super manageable or paid off.

Stuart: Oh, yeah. No mortgage, so the house is fully paid. Yeah.

Pat: And my guess is that you don't have a lot of consumer debt?

Stuart: No, no. None of that.

Pat: And you probably have a $2 million umbrella liability on the house?

Stuart: The total is probably more than that. I kind of went for total assets, so it's somewhere around $4 million. I'll have to check. Well, I think that's...yeah, it's the house and the savings here combined. Yeah.

Pat: Perfect. Perfect. Perfect. Perfect. Perfect.

Scott: All right, Stuart.

Pat: I appreciate the call.

Stuart: Thanks a lot, guys.

Scott: Wait. But would I still convert over to the Roth IRA? What's your total family income?

Stuart: I did some Roth, so we were in the 22% bracket, so the income is probably around $90,000 or $100,000 and I did Roth conversions last year to kind of get into that, whatever that limit is in the 22% bracket. So, I will probably see...this year, I would probably do a Roth conversion this year to get us to stay in that 22% bracket, and then after that, maybe after all that paperwork's done, do the...I mean, there's no hurry to do the Roth, I mean, the rollover combined with traditional. I was just thinking, you know, I was doing this plan and should I put that kind of on the things, you know, schedule of things [crosstalk 00:21:44.568]?

Scott: Well, it just makes one less account to deal with and a little easier to manage.

Pat: Yeah. That's all it is.

Scott: Yeah. So, but you're doing the right thing. Look at the Roth at the end of the year and see if it makes sense for you.

Pat: And by the time you have required minimum distributions, then you probably want them in one just to make life a little more simple for you. Appreciate the call.

Scott: Yeah. And Pat, we briefly talked about umbrella policy, and I think it's one of these things that sometimes overlooked, and as your assets grow, it's important that you have some outside insurance to protect you because you get in a bad car accident, let's say it's your fault, and let's say, like, horrible situation, you're driving to work and there's some young surgeon who's jogging and you hit the guy and kill him and that's like a horrible, horrible accident, right? The first thing an attorney's gonna do is do an asset search to see if you have any money. If you have no money at all, then it's like, "Well, what are the limits on the insurance company and let's see what we can get," and some attorneys might even say, "I can't even take the case. There's nothing to get there." But if you've got a lot of assets, they're like, "This is good."

Pat: This person's got a lot of assets, we're gonna be able to recover some money for the family, the surviving family.

Scott: And so the larger your assets, the greater at risk you are for having lawsuits, whether it's something as serious that, or something minor, like a kid is over at your house swimming and slips and hits his head or something.

Pat: A grandkid or...

Scott: A grandkid's friend.

Pat: Yes. Yes.

Scott: So, the umbrella liabilities are a big deal, and as they go up, the chance of you using them are slim, but the protection's enormous.

Pat: And it's not that much. The move from a million to $2 million isn't twice the cost. The move from $2 million to $4 million is not twice the cost. It gets progressively lower as a percentage to the cost the bigger the policy because although there's risk there, there's less risk to the insurance company.

Scott: Yeah. So, if you haven't reviewed your umbrella policy in a while, I would encourage that. We would encourage that.

Pat: Yes.

Scott: We're talking now with Art. Art, you're with Allworth's "Money Matters."

Art: Hello. Good morning, gentlemen.

Scott: Hi, Art.

Art: Hey, thank you for taking my call.

Scott: Yes, thank you.

Art: I had some questions and it's kind of...I'm gonna give you a little bit of a history about what my questions are about. Okay. First of all, I'm gonna be 62. I'm retired. I'm a retired former California state employee, safety employee, so I've been retired for nine years, and I draw a pretty good pension. Earlier this year, my wife passed away.

Scott: Oh gosh, sorry.

Art: And she was diagnosed with ALS and it went pretty quick, but anyway. So, as part of this when I notified PERS, they said, "Hey, well, you know, because of a life-changing event, you can change your benefits." So, now a little bit more about this, I have three daughters.

Scott: Your benefits in regards to medical or benefits in regards to your pension?

Art: The pension. The way I had set it up when I retired was that if I passed away before her, nothing would change, and if she passed away, nothing would change. Same amount. So...

Scott: It's, yeah, called a joint and 100% survivor. Yeah.

Art: Exactly. So, they asked me if I wanted to change it, that I had a year to do it, so one of the things I had looked into is that...A little bit more history is that I have a son who's 40 years old and he's disabled, totally disabled. He's been disabled since he was 2 years old, and he lives in a group home. And I know back around 2018, I believe it was, I guess some laws changed about special needs trusts. So, the survivor benefit for him is if I pass away, he would get about half of my pension in a special needs trust and it would not impact his benefits that he's getting from the government. Prior to that it would impact everything. So, and the other part of it is I have three daughters and I'm thinking about changing the allocation of my pension benefits so that they have survivor benefits upon my death. And it wouldn't be that much for them, it'd be like 1200 bucks a month or something like that.

Pat: $1200 between all of them?

Art: No, each.

Pat: And how many children do you have?

Art: It would be three, three daughters.

Pat: And, yeah, I thought you said that you had a 40-year-old special needs child?

Art: Yes, I do. And he would get about half of the pension as a survivor benefit according to the PERS people.

Scott: PERS enables you to change your survivor beneficiary to...

Pat: Yeah, but your pension would go down substantially, would it not?

Art: You know what? Based on the formulas that I did, it would go down about $1,200 a month.

Pat: And what is it now?

Art: What's that? The pension?

Pat: Yes.

Art: Right now it's right around $9,600 a month, so it'll go down to about $8,400.

Pat: $8,400. Okay. And so what's your question for us?

Art: Okay, here's my question is that I have about a half a million in rollover IRA of which about 20% of it is in a CD that I purchased about a year ago at about 5.5%, so it is gonna expire this coming month in September. So, everything else is 100% equities. I don't have nothing else.

Pat: I'm sorry. So, how much did you say you had in CDs?

Art: A hundred thousand [crosstalk 00:27:16.213] 20%.

Pat: Okay. All righty.

Art: And I have about $220,000 in savings accounts, in an online savings account that's drawn me 5.25% interest. So anyway, here's my question. My question was is that I'm thinking about doing this so that I can leave something for my daughters, because they would draw this like $1,100 to $1,200 a month until they passed. But again, my health is pretty good. I may live another 20, 30 years, so, you know, versus doing something like that. I thought about putting the extra money that I have monthly just into a regular brokerage account and letting it grow that way or changing the beneficiary so that they could get something upon my death. Now, the other one is that I have, like I said, over $200,000, and if I did something like that, would it be worth converting some of that other money over to Roth and using the savings account to pay the taxes on?

Pat: Yes, yes, yes, yes, maybe. Right? So, you're talking here and what are you living on a month?

Scott: And Pat, I'm totally unaware that you can change...

Pat: Certain ones, there are resets on them. All they're doing is they're just recalculating a new life expectancy with a different beneficiary just like it was day one, Scott.

Scott: Yeah. But, I mean, there's adverse selection that happens in that process, so I mean, it's a...

Pat: Correct.

Scott: From an actuarial standpoint, that doesn't exactly add up. There's like...

Pat: We're talking about a government pension here. So, what...

Art: There has to be a life-changing event in order to change it [crosstalk 00:29:02.314].

Pat: Well, yeah, but the beneficiary of the pension passed away. So, what are you living on a month?

Art: Right now, I have no debt other than my house. My mortgage payment is real low, it's not that much and it'll be paid off in about three years. I owe about $68,000 on it and it'll be paid off in about 3 years. And I don't use the money that I have because I was able to get a real low refinance here during the pandemic, and so it's like 2.39% and I'm earning over 5% so [crosstalk 00:29:38.716].

Pat: Yeah. There's no sense of paying it down.

Art: Yes.

Pat: So, what happens is you can't really compare putting the money that you saved into an account.

Scott: Well, he's just trying to look at how do I best take care of my children...

Pat: No, I understand that.

Scott: My adult child and leave something for my girls. What's the most economically favorable way to do that? Do I take a reduction in my pension today? Which is, this is what you're asking yourself. Is that right? Do I take a reduction in my pension today so that when I die, which could be today or 40 years from now, sometime when I die, my children will receive some portion of this pension?

Pat: Yep. But you can't really...

Scott: Or do I invest...do I have other money set aside?

Pat: But you can't really compare the two because if you started saving that $1,200 and you died a year from now, you wouldn't have gotten anywhere. The only way you could compare that to is if you took the after-tax dollars from your pension and bought a life insurance policy that would provide a stream of income to your surviving benefits. But that has a whole different set of downfalls to it. I gotta tell you, I think you should sit down with a qualified advisor and pay for their time.

Scott: And run a bunch of scenarios, right? Because you got a lot of moving balls.

Pat: And other than...The three girls, daughters, are they financially stable? Do they need money? Are they doing okay in life?

Art: Okay. That's the other question. Two of them have some medical issues that aren't severe, but they do have some medical issues that could impede them later on down the road, so that was one of the other reasons why I thought about doing something like this.

Pat: I gotta tell you, that would tilt me in the [crosstalk 00:31:26.210].

Scott: Yeah. I mean, it's a unique situation. You've got a disabled child.

Pat: There's nothing you have said in this conversation that wouldn't cause me to want to take that reduced benefit and...

Scott: I know. I think the same thing.

Pat: There's nothing you have said that...

Scott: Even if you said, "I'm gonna take..." Here's what actually might...the numbers might actually work if you said, "I'm gonna take a $1,200 reduction in my pension today so that my kids are gonna have this, and then I'm going to take some of my other money and buy a commercial annuity in the marketplace to make up that 1,200 bucks." My guess would be that would be more favorable for you than doing nothing.

Pat: I'm guessing you're right.

Scott: Just because I don't think it's priced...The underlying calculations, I don't think it's...

Pat: They're priced in your favor.

Scott: Correct. Yes.

Pat: In terms of, so there is...

Scott: Good negotiation at the time of the...

Pat: Of the contract. So, there's nothing you have said that would stop me from actually just converting this thing to a joint and survivor, especially, especially if you're not living on all of it. And like Scott said, even if you are, there's probably other ways that you could fill that gap that are more advantageous to you.

Art: Well, that absolutely...you know, another question that I had on the side of this too is that, you know, I started working for the state back in 1988, so I had not paid into Social Security since before that. And I'm one quarter short of qualifying for Social Security, so I have 39 quarters. So, and that was another thing [crosstalk 00:33:05.638].

Scott: Oh, my gosh. And you only need, how much, $800...? How much do you need to earn in a quarter to qualify? It's like 800 bucks.

Art: I think it's $1,700.

Scott: $1700, that's nothing.

Pat: Were you in law enforcement?

Art: Yes.

Pat: Oh, go get a job as a school resource officer for a year.

Scott: You don't need a year. Go get a job.

Pat: Come on. You gotta sign up for at least the whole school year. You can't leave [crosstalk 00:33:25.422].

Scott: Oh, you don't have to be at school. You can go...I was gonna say be a bouncer, but you're on the little older side, so I don't know if he wants to hang out at a bar at 2 in the morning.

Pat: No, no. So, and by the way, there is some legislation right now to repeal what they call the windfall elimination provision, whether...

Scott: But even with that, it's...

Pat: Oh, you should most certainly. We did it with my mother who was disabled and she was two quarters short and it was so little that she went and got a job at a florist for a couple quarters in order to [crosstalk 00:33:57.731] qualify.

Scott: It doesn't need to be much job. Whatever that dollar amount is just, even if I had a friend that owned a business, like, "Hey, can I work for you?"

Art: No, actually, that was the thing. I have a friend that does own a business and I said, "Hey, hire me. Just I can push a broom in your business for a couple months."

Scott: That might be your best investment of your whole life.

Pat: That's right. That's right, just because you're so close. So, there's a couple things you should do. One is just go get a job tomorrow, make the money, you know? And the other is, you might wanna sit down with a qualified advisor, but there's nothing that you have said in this conversation...

Scott: It's a really unique situation.

Pat: Yeah. Nothing that you have said in this conversation that would stop me from changing that benefit and taking a reduced $1,200 a month in order to provide that to your children.

Art: Yeah. No. And like I said, I have no debt. My house [crosstalk 00:34:43.719] paid off. And I was taking...the reason I had built up my savings so much is every month I was sending $2,000, $3,000 into the savings account because I had that much left over every month after [crosstalk 00:34:57.555].

Pat: Okay. Even more argument. And you went through a big life change, right? Which, you know, obviously not good, but it's a reset and...

Scott: I think this sounds...

Pat: It sounds great.

Scott: It sounds fantastic. And you think about, you know, being able to leave your kids something when you're gone, like a monthly pension is fantastic.

Pat: Yes, because they're not gonna...

Scott: Blow it on a new Lincoln or something.

Pat: Lincoln?

Art: Exactly.

Pat: Well, these kids, who's buying...what kind of kid buys a Lincoln?

Scott: Hey, Art, appreciate the call. No, you know what it was, it was years ago, I had a client. He had an inheritance and he went and spent...like, bought the fanciest Lincoln SUV like the week later. And this guy, it's not like he was loaded to begin with, like the...So, I've never forgotten that.

Pat: The Lincoln Navigator?

Scott: We've seen it all, right, with beneficiaries and how people treat their money and stuff. It's all over the map. And nothing wrong with Lincoln. I'm not disparaging Lincolns at all. Oh, it's an Oldsmobile, not your father's Oldsmobile.

Pat: Yeah. It's a Lincoln.

Scott: But that was...

Pat: It's interesting.

Scott: That last call was super interesting.

Pat: Well, look, we did mention that they're trying to eliminate the windfall elimination provision, which by the way, it...

Scott: Well, who knows?

Pat: Yeah. Who knows? I have feelings about that, that you didn't pay into it, but you get a benefit. Well, we'll see what happens.

Scott: Yeah. All right. Let's continue on with calls here. Let's talk with Darren. Darren, you're with listening to Allworth's "Money Matters."

Darren: Good morning. Thanks for taking my call.

Scott: Yeah, thanks for calling.

Darren: This is a question that you guys have answered before on your show. By the way, I love your show. Love listening to you guys.

Scott: Thank you.

Darren: But you've covered this before, but it seems like each time it's an individual case, but it has to do with when to withdraw Social Security. My wife and I are both retired approximately three years. I'm gonna be 65 in October, and she is currently already taking her Social Security.

Scott: And how old is she?

Darren: She is 67.

Scott: Okay. And did she start on her full retirement age or did she start before then?

Darren: She started at full retirement age.

Scott: Got it. Okay.

Darren: And our account is professionally managed, and the advice that I'm getting from our account manager is to delay and wait. We might as well wait on me taking my Social Security just because it's just basically cheap insurance going forward because we don't really need it at this point. But from what I've heard from you guys giving advice on this matter, it seems like I should be taking it now.

Pat: What's the account balance in retirement plans and outside of retirement plans?

Darren: Total is about $3.8 million.

Scott: And do you have any pension income?

Darren: I do. I have about $67,000 a year in pension.

Scott: Yeah. So, plus Social Security, now we're well over $100,000 when you add required minimum distributions, dividends, interests and stuff in 10 years. And the $3.8 million, how much of that is in retirement plans?

Darren: Just over $3 million. Yeah, just over $3 million.

Scott: And so the advice you got was to let that $3 million continue to...or to start spending down some of that and defer your Social Security?

Darren: Well, so of the non-qualified, I have about $735,000 in a non-qualified account and I'm actually withdrawing some of that right now just because I am helping one daughter change careers and paying for some flying lessons for her and then we also have...we've taken out about an additional...we're paying taxes of about $28,000 to move, which is a whole nother subject, but moving monies over to a Roth.

Scott: Okay. Good. Thank you.

Pat: That makes sense.

Scott: Thank you. Thank you. You were scaring me there for a little bit.

Pat: Roth conversion I'm totally on board with.

Scott: Makes a ton of sense. So let's, you know, think about this full retirement age, right? And here's why this question's difficult. You're asking about Social Security. We can all run the numbers based upon current assumptions, right? What a return will be on your investments...

Pat: Life expectancy.

Scott: Whether you should take Social Security or not take it, what happens to the account balance? So, when we run these pro formas, right, these models, what happens is we set an income, but...Go ahead, Pat.

Pat: Well, we set an income level of you're gonna take the equivalent amount of money out of your Social Security, out of your accounts, where do you end up?

Scott: These models also assume that there's no change to Social Security, right? And we know statutory in 10 years, whether it's 9 years, 11 years, but the Social Security Trust Fund will be depleted and it's mandated in there there's across the board reduction in benefits.

Pat: It's like 22% right now, across the board reduction in benefits.

Scott: It means if you're getting...if Congress does nothing, that's what's gonna happen to Social Security. If you're getting $1,000 a month and you're a 78-year-old widow living in a subsidized housing, your income is going to go to $780 a month. That's what is in the statute today. But Darren, and so who's worth over $4 million, owns his home, and has got a pension of $67,000 a year...The assumption that we need to make, like the only reason you would delay Social Security is if you believed that Congress would not allow this reduction of benefits to go through. If you believe that Congress would step in and they've got the votes, "We're gonna step in and we're gonna make sure that everyone is whole," that's the assumptions people make today if they're...By every month you delay, you're making that bet.

Pat: You're saying, "I don't think there's going to be any change in legislation."

Scott: There will be change in legislation. It'll be to fix the problem that's gonna occur.

Pat: Understand, but by you delaying, you're saying the status quo will continue forever.

Scott: Yes. If I were in this...

Pat: I'd take it in a second.

Scott: Yes. My concern is that it's nine years out, we're about to hit this cliff. There's debate in Congress. We need to make people whole. Then someone says, "Well, wait a minute. Why do we need to do that? Why does Jeff Bezos need to get Social Security? He doesn't need it." Well, if Jeff Bezos doesn't need it, then...

Pat: There's a line.

Scott: Wherever that line is, right?

Pat: Where's the line? So...

Darren: And nobody knows.

Scott: Nobody knows.

Pat: Of course. And by the way, this full retirement age thing, I had someone ask me, a friend asked me about full retirement age and survivor benefits, the full retirement age, if we absolutely believe that there'd be no change in legislation, we wouldn't pay any attention to the full retirement age. We would just start taking it at age 70. The only thing the full retirement age is allows you to make wage income and still qualify for 100% of your benefit. That's all the full retirement age does.

Scott: Well, and the formula is based upon that though. There is a reduction or an increase based upon if you take it earlier or later.

Pat: But the increase and the reduction is the same after the full retirement age as before. So, it doesn't...right? So, it makes no difference other than the fact that...So, I gotta tell you where...

Scott: So, these are opinions. So, you called for an opinion. Nobody knows.

Pat: I'm 61, right? My wife is 61. She'll qualify for Social Security at age 62 as will I. But...

Scott: You're still working.

Pat: I'm still working.

Scott: So, you can't take it.

Pat: I'm not gonna take it. She'll take it the minute she qualifies. The minute she qualifies. In fact, that's what really attracted me to her.

Scott: Is this lifetime benefit of Social Security.

Pat: So, the opinion is, if I were you, I'd take what I could get when I could get it.

Scott: Your required minimum distributions are gonna be hitting about the same time. You're gonna be 75 at the same time Social Security, you're gonna...

Pat: It's not gonna...Scott, it could happen much, much sooner than that.

Scott: Oh, you mean a reduction for high income, or additional taxation, or surtax?

Pat: Yeah. They're talking about the windfall elimination provision, getting rid of that.

Scott: How are they gonna pay for that?

Pat: How are they gonna pay for that?

Scott: That'd be one way, right?

Darren: Right. And clearly, like you said, the reality is that they're not gonna cut everybody across the board at the same percentages because they're gonna have to take care of that woman who doesn't have much income at all. They're not gonna cut hers the same percentage they're gonna cut somebody...

Pat: That's our belief. Well, no, this has got historical precedent.

Scott: I know it.

Pat: Right? If you've listened to this show at all...

Scott: Just the way the taxation of [crosstalk 00:44:46.435].

Pat: The taxation, when I started in the industry 30 years ago, Social Security wasn't taxed.

Scott: Now 85% of the benefits are included for taxable income if you have...

Pat: On incomes of a couple, a livable wage, $44,000 not adjusted for inflation. Not adjusted for inflation, 85% of the benefit could be taxable. So, if I were you, take it.

Scott: Yeah, yeah. Hey, wanna let everyone know that we are having a special time in the studio. Pat and I are coming in the studio for a couple hours just to take phone calls. And so if you've got a call that you think, "Yeah, I wonder if those guys' opinion would be for me," would love to talk to you. It's Thursday, September 5th from 9 to 11 a.m. Pacific Time. Okay? Thursday, September 5th, noon to 2 Eastern, 9 to 11 Pacific. To sign up, go to questions@moneymatters.com, questions@moneymatters.com, and that's the all the time we've got. It's been great being with you. This has been Allworth's "Money Matters."

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