The Financial Blind Spots High-Net-Worth Investors Can’t Ignore
On this week’s Best of Simply Money podcast, Bob and Brian issue a critical warning for anyone who’s never vetted their financial advisor—breaking down a real-life fraud case and how to protect yourself. They unpack whether gold belongs in your portfolio, reveal the hidden risks of neglected 401(k)s, and explain how to make them work harder for high-net-worth investors. Plus, smart listener questions on helping kids with a home down payment, guarding against early-retirement market drops, and unwinding a concentrated stock position without triggering a massive tax bill.
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Bob: Tonight, a warning for anyone out there who thinks their financial advisor is absolutely legit, but they've never even checked that person out. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Now, we all like to think we'd spot a scam from a mile away, but what if the scammer looks the part, walks the walk, talks the talk, and even promises to never lose you a dime? Are you really sure your advisor is who they say they are? This is a pretty important segment, Brian, especially stemming from a situation that happened recently in New Jersey.
Brian: Yeah, the SEC has filed fraud charges in federal court against 46-year-old Joel Sofia. No idea if I'm pronouncing that right. But for allegedly opposing as an investment advisor and misleading his clients. What they say he did, that he never registered with the SEC as an investment advisor and never held any securities licenses. You and I both know there's a lot of work that goes into that, not only to get those licenses in the first place, but to maintain them and do all the things you have to do to stay on the good graces of the SEC.
So, they say he falsely claimed decades of professional experience as an options trader, and misrepresented his credentials to, at least, three of his clients. I'm going to guess there's probably more than that. And his pitch was that he guaranteed clients would never lose money. Oh, by the way, this is what you should listen for. If you hear this, run the other way and warn people around you. Guaranteed that clients would never lose money and promoted fake proprietary AI trading software that would supposedly eliminate all risk. You know, Bob, why haven't we signed on for these things, yet? It's so easy that I can't believe that we don't need Andy Stout or his team anymore. What a bunch of clowns. We need some proprietary AI trading software to eliminate risk.
Bob: Proprietary. You and I could come up with a software. We could beat the market all day, every day, and never lose any money. But, hey...
Brian: And make it proprietary and never have to explain how it works.
Bob: Well, and here's the problem, here's the downside here, clients gave him direct access to their brokerage accounts. So, basically said, "Here. Log in." Traded at will. And, you know, he placed thousands of trades on their behalf, no doubt, marked them up for commissions, spreads, what have you. And instead of consistent gains, the option trading caused severe losses, with accounts losing 61% to 89% of their value. And by early 2023, total losses to just these three clients exceeded $1.6 million.
And is usually always the case when stuff like this happens, when investors raised any concerns whatsoever, this guy was nowhere to be found. Or in some cases, he allegedly blamed them, or promised a recovery, and then he stopped calling them back altogether. Brian, we've seen this happen from time to time. You and I have both been doing this a long time. I can remember, one situation here in the greater Cincinnati area with a local insurance agency where the guy was building fictitious statements, and built up a lot of trust with people. I think it was over on the west side of town. I won't get into names.
But I'm sometimes surprised at how few questions people actually ask when they come into the office. I mean, you have a nice office, nice lady at the front desk welcoming you in, free coffee. We got a good monitor on the wall. We look like we know what they're doing or what we're doing, but you still have to ask some basic questions. Let's get into some of that because this is important.
Brian: It is important because Americans report losing $5.7 billion to investment scams in 2024, according to the FTC. Again, that's billion with a B. Think how many 401(k)s and rollovers and life savings and all that are involved there that just went poof. And now, those people are scrambling and living off of, I don't know, welfare, their relatives, their kids, who knows? But since FTC data is based on consumer reports of fraud, we don't really know exactly how much, you know, those are the ones it's caught, and people are willing to admit it. There's a lot of people out there who take losses and don't tell anybody about it. So, we don't know about those. So, the true scope is probably even higher.
And these are some of the words you hear occasionally, but some of these frauds include pig butchering scams, which references the practice of fattening a pig before slaughter. So, in other words, what you're doing is doing probably legitimate things to pull in more and more money by managing it legitimately before the actual scam occurs. You're fattening the pig by getting them to bring in more and more to their account. Then you pull the trigger as the scammer.
So, here's the things you've got to look for. Are you a fiduciary? That's something we mentioned from time to time. And that's what we here are at Allworth 24 hours a day, seven days a week. That is, that's all we do. Every decision we make has to be for the benefit of the client. We have to be able to prove that in a court of law. That's why we focus so much on financial planning. That's the job of an advisor. In my opinion, a fiduciary advisor is responsible to make sure his or her firm, even if it's their own shop and they hang their own shingle, that advisor is responsible to be able to say, "Yes, we know the story of the Johnson family. Here's where their resources are. Here's what they're trying to accomplish. Therefore we recommended X, Y, and Z. That's what being a fiduciary is. Knowing and making those decisions based on the best situation the client can have.
Compensation matters. Is it fee-only? Is it commission fee-based? None of those are particularly evil unto themselves. They're just different ways of doing business, and they have different conflicts of interest in there. But make sure you understand exactly how that advisor is going to get paid to work with you.
Bob: Yeah. And a lot of folks are fiduciaries, but are they fiduciaries all the time? I mean, there's a lot of people that, you know, wear both hats. They're fiduciaries some of the time with their fee-based accounts, but they also offer broker-dealer-based accounts and commission-based accounts. Again, like you said, that's not evil or wrong or doesn't mean you shouldn't do business with one of those folks, but it needs to be disclosed upfront. How are you paid? What's in it for me? Are you acting on my best interests all the time, or just selling me a "suitable" product?
Credentials and background questions. These are important, but I don't think that's the end all be all. I mean, people could go out and take the... Like you and I have, we could still take the DFP, the CHSC, have all these designations, and still be crooked as all get out, right? I mean, you know, there's things like broker check out there, you know, that is a tool that's been created by FINRA, the Financial Industry Regulatory Authority, to research the background and experience of all financial advisors and the firms they're with. But that's really no absolute safeguard that anyone's going to act in your best interest just because they have, you know, 15 letters behind their name.
A couple other things to ask about, just process and philosophy, which I think people do a good job of when they come in, at least, and talk to us. Here's the one I want to spend some time on, and this is a must. You have to have your assets custodian at a reputable custodial firm like a Schwab, like a Fidelity, like a major broker dealer out there. There has to be someone between the advisor and your money who's holding the assets, building the statements, reporting the results, all that. And where most of these fraud cases come in is where this "advisor" is not only making the recommendations, but they're building their own statements, and there's not a good reputable custodial firm in the mix. That is a must have, I think, in today's day and age, Brian.
Brian: Yeah, I think you're right. That is a huge red flag if you... That doesn't mean you have to have heard of the custodian. Maybe you've never heard of them. You're not that close to industry. You might not know who all the players are. But the big ones are Schwab, Fidelity, LPL, and there's a few other big names out there. Doesn't mean the smaller ones are less capable. But the point is, pay attention to it.
This is how Bernie Madoff got away with what he did. He used to be the chair of the SEC, so nobody asked him any questions. They just assumed he was on the up and up. He made up every statement he ever had. And it's an interesting read if you get the book on it and read exactly how he did this, because it's a lot simpler than you might think. What he would do is spread the newspapers out on the floor and he would slide across with a magnifying glass on a rolling office chair. And he would simply look for movement from the day before that would support the fake returns he wanted to put on his statements. And so, it was verifiable. All he had to do is put it on statements and he could say, "Well, yeah, X, Y, Z stock did this, and therefore that was our return."
None of it was real because he didn't actually make the investments because the money wasn't there to begin with. However, there was nobody there to pay attention because nobody asked him any questions. There was no custodian. There was also nobody to ask questions because of that, because the clients simply trusted, "This guy's making me money hand over fist because I have this piece of paper that says so." That's all it was.
These scams are not that hard to pull off. Pick off a couple of people who trust you, and those people will bring you their friends because we just super, super want to believe that there really are these guaranteed, double-digit returns with no risk to principle that just doesn't exist. Turn around as soon as you hear that, you know, and start to warn your friends. Because a lot of times, these guys show up in trusted groups, right? They pop up often in church groups, you know, and other kinds of affinity groups, neighborhood groups, those kinds of things where there's several people in the room who say, "Yeah, this guy's legit," or, "This lady is legit. I trust him, so you should, too." And that's really all it takes to knock our shields down, Bob.
Bob: Brian, I'll share one example of how this is supposed to work. And this is a mistake that I made personally earlier in my career. It was all well intentioned, but the moral of the story is you also need to have a good compliance department behind you. And here was the story. I had a client. You know, we're with a broker dealer. They're getting their statements. And the client would call and say, "I can't understand my statement. I want to see the information this way or that way. Will you just build me a letter once a quarter or something that just tells me how I'm doing relative to the indices and my portfolio and what have you?"
So, in an effort to help this gentleman, I did it. I published a letter. I think it had a spreadsheet and a few columns with it. And I reported kind of, you know, Bob's cliff notes version of his investment statement. And I'll tell you what, within three days, I got my hand not only slapped, but I got levied personally with a pretty big fine from my broker dealer that I had to write a check for. And because I unknowingly broke a rule. And the rule was you never personally report any investment returns to a client. All of those kind of reports have to come directly from the broker dealer or the custodian.
And I learned that lesson, you know, the hard way. But it was a lesson I'm glad I learned because I knew I was with a reputable firm that had my clients back. And there was no way that these clients were going to get deceived or lied to or what have you through me or some other advisor just making up numbers or self-publishing some kind of document. And believe me, I got religion on that whole topic, you know, that day, you know, after writing a fairly sizable check.
Brian: Yeah. One time I had an issue. And nothing similar, slightly different, but an interesting thing that taught me about how important compliance is. I was involved in an email discussion with another advisor at another firm, just somebody I knew personally, and we were griping about something with the SEC. And he made some comment about how the SEC should be banished because of the... He just listed off a bunch of stuff that wasn't true at all. I replied to it was kind of like, "What are you talking about?" And then just kind of shut down the conversation and I let it go after that.
About two days later, I got an email from my compliance department who had been reading those emails because that's their job. And they picked up in the scanner thing because of his reply, which was in my reply when I replied to it. I'm glad they do that, though, because what they're looking for is the bad apples. They're looking for somebody who is communicating in providing guarantees and doing all this stuff. That's why they're reading emails that leave the firm. I'm very glad they did that. But it was just I didn't know they were looking that closely. Because, again, they picked up something that somebody else said, and it simply came up in my reply because his message was pasted at the bottom of it, just the way Outlook does things. So, anyway, I believe compliance is there for a reason, and they sure do a great job of keeping me from having to know the rules.
Bob: Absolutely. Here's the Allworth advice, don't just trust, verify. Ask the tough questions up front, because recovering from a scam is a whole lot harder than preventing one in the first place. Should gold be in every investor's portfolio? There's a new argument out there being made for it. We've got our take on that topic next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast. How do you adjust when your monthly budget and actual spending just don't quite match up? We'll help two local couples figure that out straight ahead at 6:43. That'll be fun, Brian.
All right. We have an opinion piece here in MarketWatch that we came across, and the headline made this blanket statement, "Gold just made the case for why it should be in every investor's portfolio." The article was written by Naeem Aslam. I hope I got that name pronunciation right. He is a chief investment officer at Zaye Capital Markets in London. What do you say about this, Brian?
Brian: Well, let's look at his arguments first, what he's talking about here. Gold just surged past $5,000 an ounce. That's a historic high. That isn't just about inflation or a weak dollar anymore. So, what his argument is, is that gold's rise reflects structural concerns about geopolitical risks, unpredictable policy decisions, and market instability. In other words, he's saying investors aren't buying gold to chase price gains. They're buying gold because they're worried about what might happen.
Now, Bob, I don't know about you, but I think that defines every single time investors have bought gold. It really happens when we have a whole bunch of scary things going on, and then we get the gold brokers that come out of the woodwork who don't care about the value of gold. They're trying to create the transactions because they are the middleman. That's where you start seeing all the commercials and you see all the ads on the internet. And I'm seeing an awful lot of that lately. But again, those shops don't own a bunch of gold that they're trying to sell to you. They're trying to affect the transactions so they can carve off a little piece of it. They're just being brokers.
Bob: Yeah, you make a good point there. And believe it or not, and I didn't know we were going to be doing this segment, yesterday, I listened to a pretty interesting podcast with an interview with Peter Schiff, who is a pretty well-known investment guy. And he actually owns a gold company, a gold broker, among other things. And he was warning folks exactly of the point you just made. We all can flip on cable TV at night and we see these celebrity spokespeople for gold go on and on and on about why you should own gold. And the point Peter was making, and it's a good one, is there are tremendous markups on this stuff.
I mean, these gold companies that advertise all the time, they've got to come up with some money to pay for all these advertisements. And the place they come up with the money is the bid and the ask on these coins or bars or whatever between what they're really worth and what the public is paying for them to say nothing of paying their celebrity spokesperson. So, it is kind of the Wild West out there sometimes. And so, buyer beware if you're just saying, "Well, so-and-so spokesperson who I love, they buy their gold from that particular broker, so it should all be good. And you just dive in headfirst into the pool." Good point that you raised there.
But let's get into the fundamentals of gold itself. I mean, there's a lot of reasons to buy it. But I think, at least, from my standpoint, I look at it as a good long-term play, I think with no more than 5% to 10% of your portfolio just to protect the purchasing power of your money. Because let's face it, ever since 1971, when the United States went off the gold standard, where you could actually trade dollar for dollar currency for the current price of gold, gold has gone up in value by away wider margin than the dollar. And I think gold is a good hedge against inflation in purchasing power.
I mean, silver, let's face it, silver has doubled already, Brian, in 2026. Some of this stuff is getting parabolic right now. There's a lot of people... I liken it in the short term. Now, I'm talking about short-term trading. It's no different than buying NVIDIA. After it goes up 300% and everybody knows about it, they start asking questions. Should I be in it? Well, the big money has already been made. That doesn't mean don't get into gold. But just understand that gold can decline in price. It can fluctuate in price. It's a lot more volatile of an asset than holding currency or cash or what have you, or treasury bonds. So, you just got to look at why you're doing it and over what time frame, I guess, is my look at it.
Brian: Yeah. And I think for those of you who are sitting on the sidelines and thinking, "Well, I don't have any gold. Maybe I should get into precious metals," and all that kind of thing, remember, the time you're doing it, your gut is telling you to look into it at a time where, like we just said, it's all at a historical high. And this is not a question I'm taking from clients very often right now, I think that's because the market is actually holding up pretty well. It seems like it should be a little bumpier than it is with concerns just about everything under the sun at the moment. But right now, remember, all the market cares about, the only opinion the market ever has is, can we make a profit or not? And right now, visibility seems to be pretty good that that is going to continue.
Anything can drive us over the cliff. Remember, we never have declared this soft landing from the COVID recession, but we've just kind of stopped talking about it. So, there's still things out there, there are still challenges to be had, but at the same time, just be calm and rational and decide what you... You know, if you want a little piece in precious metals, that's fine. I have no issue with that. But this is definitely not a time. And I'd say, it's never a time to bet the farm on any one thing.
Bob: Or don't put money that you're going to need in the next one, two, or even three years in gold. It is not a short-term liquidity vehicle. It is a long-term play to protect your purchasing power, and by all means, if you're going to get involved, find or get a referral to a good, reputable, dealer who will treat you right. Everybody's got to make a little money, but the markup should not be that big.
All right. Here's the Allworth advice, should gold be in every investor's portfolio? Sure, it can have a place, but how much and why depends on your personal long-term financial goals. Coming up next, we launch a rescue mission on one of the most overlooked parts of high net worth portfolios, that dreaded, neglected 401(k). You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's be honest, when you hear the words 401(k), you probably think about your very first job out of college. You said it, you forget about it, and you move on. But if you're now worth, let's say, a few million bucks, maybe even more, that first 401(k) or first two or three 401(k)s could be the weakest link in your whole financial plan if you've completely thrown them in the proverbial drawer and forgotten about them. And so, tonight, we're going to go on a little rescue mission. We're going to tell the story of someone who built some real wealth over the course of their career, but never circled back to fix that major blind spot, those old 401(k)s, Brian.
Brian: Well, we're going to talk about Laura. Laura is a fake person. I would say, all of our stories we share here are real stories that come from real clients, but obviously, names are changed to protect the innocent. And today, the innocent's fake name is Laura. Laura is 58, she's married with two grown kids, and she owns a marketing firm in Cincinnati that did really well in her 40s. And today, she and her husband have a net worth of about $3.2 million, including some real estate, brokerage accounts, growing cash reserve, typical assets for somebody in that kind of a position, and life is good.
But she came out to me with a financial advisor. And during that whole review, what stuck out was a 401(k) that was a $480,000 account. That's a significant chunk of her net worth. It's still 100% in a 2035 target date fund. Really no customization, and no real... It looks like there hadn't been any discussion of this account really at all, because she was busy building her business, and that's where their net worth was. So, now, that wound up being a half million dollars that could have been handled a lot differently. For example, she's in a position where she's got a decent amount of assets sitting there outside the 401(k). That's what they're going to rely on to live off of in the earlier years of retirement.
That means that these accounts, the tax advantage ones, a couple things, nobody had had a conversation with her about should this stay in the traditional side, should we be thinking about Roth conversions here after you retire, and more importantly, should it really be in a 2035 target date fund? That is not that far out. And if these assets are going to sit there for maybe 20 years or longer, or possibly just be inherited by your kids, then that is a very, very different strategy. That's really where we're talking about Roth conversions. But again, it sat there in the same fund that she had decided when she first set the thing up when the business was barely off the ground and hadn't thought about it ever since, because she worked so hard.
The end result, it underperformed the market by about 2% every year over the past seven years because it was targeted for a risk tolerance portfolio that really didn't match what she needed. Now, is this going to bankrupt her? Of course not. But this is a question of efficiency. When you look at it in the context of her wealth, that's a big hole in the boat, Bob, because she left a lot of money on the table over those years for an asset that most likely is going to sit there for several decades until it gets inherited.
Bob: Yeah, I think the important thing here is just to make sure when you sit down with your advisor, you are talking about all of your assets, and you actually know what you have and where it's sitting. I mean, sitting in a 2035 target date fund isn't the worst thing in the world. I mean, the thing got probably a pretty nice return over the period that this person was ignoring it.
I came across a situation late last year which was a bit more dramatic than that. These folks had sold a business for quite a bit of money, and they were very, and are very risk averse people. They want to be almost 100% in bonds, maybe a 10% to 20% slice in the stock market just for some inflation protection. And I asked them about these couple old 401(k) accounts that they had. They hadn't looked at them in 15 years. And I said, "Well, why don't you send the statements and we'll look at it." Well, they sent the statements, Brian, and they were 100% invested in the stock market, and they were in a variable annuity.
Not only was the risk profile completely different from where these people wanted to be today as they progress through their retirement years, but when you ran a fee analysis on the whole thing, they were paying very, very high fees, upwards of about 3% all in on these annuities. So, yeah, in some cases, it makes sense to leave the money at the 401(k) if it matches what you're trying to do and you can get the investments for low cost, but in a lot of cases, it's not the case. This was one example where it was just a no brainer for multiple reasons that I've already covered to just consolidate this over to the assets that we were handling for them, and they were glad we had the conversation.
Brian: Well, that's good to hear. And that's the whole point of that entire type of a discussion. Just to make sure that you understand what you own. One of the interesting phenomenons we see every now and then is, we take people through this risk discussion, they'll say that they're super conservative people, and then like you just said, we look at the portfolio and it's invested really, really aggressively. And oftentimes, they'll show us this, and they won't have reacted to 2022, which was, as I always say, one of the five worst market years we've ever had. And it's like, "Are you really this risk averse? Because it didn't appear to have bothered you that 2022 came out the way it did." So, it's almost like sometimes those risk questionnaires are more of a, "Here's where I think we should probably be, but we're really okay not being there." So, that's why risk is a discussion, not just a questionnaire. But that's still an important thing for you to talk about with your advisor to make sure everybody's on the same page.
Bob: Here's the Allworth advice, if you've built some real wealth, you can't afford to just let those old 401(k) plans lay around and coast. It deserves the same level of scrutiny and customization as everything else in your plan. All right, can you afford to give your kids, let's say, $25,000 each for a house down payment and still retire comfortably. We'll dig into that question from Loveland next, plus whether an $8,000 a month retirement budget really holds up over the long haul. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Greg in Madeira says, "I'm worried that one bad year early in retirement could change everything for us. What practical steps can you take to protect against that without parking everything in cash?" Great question.
Brian: Well, Greg, you're talking about something called sequence of returns risk. And the reason this is so dangerous, it's timing, not the long term averages. So, a poor market year, like you said, in the first few years of retirement can permanently shrink that capital base you're drawing off of, even if markets recover later as they always have in the past. The solution is not to walk away from growth because this can happen. It's to separate the income I need now from the money that can grow over time.
So, really what that looks like, maybe somewhere between a giant cash pile and no cash pile at all. Build that retirement paycheck buffer. I always suggest, look at the things you're going to need to spend money on. You know the bills that are coming due over the next 12 to 24 months. The good idea would be to make sure that that particular pile of cash is sitting somewhere safe, generating a little bit of interest, but its job is to be spent to pay those bills. That means that if the market does go the wrong direction early in retirement, it doesn't hurt you because you weren't going to spend those particular dollars anyway.
And you can also take this a little further by looking at and segmenting your dollars into buckets. Maybe the first bucket is money you're going to need between now and three years. That's really liquid. You know, again, you're looking for money markets, high yield savings accounts, those kinds of things, maybe a CD. Second bucket for 4 to 10 years, which would be a little maybe like a balanced fund, you know, inflation-protected assets, those kinds of things. Then, of course, your 10 years and out bucket, that's the long-term growth money that's going to be pretty heavily invested toward the stock market side. So, just be thoughtful about when these dollars are due. And you don't have to invest every single dollar the exact same way if these are concerned. So, I hope that helps.
Ron in Marymount. Ron says they need about $110,000 to live comfortably. And he's wondering how much of that should come from dividends, interest versus selling investments, especially in a down market.
Bob: Well, Ron, I would first say, you know, don't let the proverbial tax tail wag the dog, meaning that you should build a financial plan based on your personal goals and your investment risk tolerance, and then set your asset allocation accordingly. Once that's done, you know, like you said, if you've got money coming in from dividends and interest, from bonds or some dividend paying stocks, you know, those are going to be pretty consistent. The other thing to look at, you know, if we're talking about selling investments or using capital gains, you want to try to get as much control over those capital gains as possible. Meaning, have some type of tax loss harvesting or tax smart investing going on, you know, in your non-IRA accounts so you have some control over capital gains and when those are generated. Versus just waking up in the fourth quarter of the year and being surprised when you get a capital gain distribution.
Obviously, from your question, I don't know how much of your assets are in IRAs versus, you know, taxable accounts. That's a big part of this whole discussion too. So, I think, you know, sit down, build your plan from an allocation standpoint, and a good fiduciary advisor can take your plan. And then also, apply some tax smart strategies to it as well to make sure that we're pulling money from the right places without triggering unnecessary taxation. Hope that helps.
All right. Alan in Loveland says, "We want to give our kids $25,000 each toward home down payments. How do I evaluate, Brian, making those gifts against our long term plan instead of just going with our gut and giving the kids the money?"
Brian: Yeah, you know, this is really the core of financial planning, right? So, I know I've got money now and I can do whatever I want to do with it. But my question is, what's that impact in the future? Can I get away with this now or is this going to hurt me, you know, 10, 15 years down the line? So, think of it in terms of retirement income. A permanent $25,000 gift is probably about 1,000 to 1,200 bucks a year of lifetime spending you're giving up. And if you got two kids going on now, you're thinking $2,000 to $2,500 per year for the rest of your life.
So, now, you're thinking, this is different from, "Can we spare the cash?" To now you're thinking, "Are we comfortable trading this much future spending for this outcome?" And then you're also gonna look at what dollars that you're using for. If this is coming from your own excess taxable assets, then that risk is usually pretty manageable, not too painful. But if you're going to be taking this out of tax-sheltered accounts, you know, Roth IRAs, traditional IRAs, that's going to be income taxable and/or you're sacrificing that tax free growth, that'll have a bigger impact on it. And then I would also stress, test the timing of it. What if markets fall 20% right after we make the gift? Well, hopefully, you've already got a financial plan in place where you can easily do this, model this out, and then pretend the market takes a hit.
But on the other hand, we don't know when you're talking about doing this. You didn't give us the age of your kids. They might be 10 years old. We're talking 15 years from now. You're thinking way ahead of time. It could be this Christmas, you're going to do it. Who knows? But in any case, what I would look at is, what have your investments done recently? Because very often, if the market has had a positive run, you might be able to do these gifts with money you didn't have a few months ago. If that's the case, oftentimes I say, you know, as long as the plan floats, take the windfall that you found from that recent market performance and do the things that you want to do for your family. So, it's not about affordability, it's about intentional trade-offs. If you'd still be comfortable with that decision after a bad market year, it fits the plan. If you wouldn't, change the size, the timing, or maybe the source of that gift.
We got one more for Tony in Newport. And Tony's asking about a single stock. He's got one worth over a half million dollars, and it's about 25% of their portfolio. He said he's concerned that if he sells it all, he's going to owe about $90,000 in capital gains. And he's wondering if it's smarter to spread that out over the years, or just tear the band-aid off and write the check and smile.
Bob: Well, Tony, if you can help it, we don't want to just rip the band-aid off and write a $90,000 check. Usually, there's some better ways to go about this. But 25% of your overall net worth is a bit high, and we want to try to get that down, you know, under 10 if we can, but do it responsibly. So, we got to take a look at your overall tax situation, what your income goals are. Just as a reminder, up to $96,000 and change of taxable income, you don't pay any capital gains taxes. So, you might be able to, to use your words, rip some of the band-aid off this year, spread it over a couple of years, and maybe gradually move down out of that position without paying any taxes at all.
But the other option is you can literally use options. Meaning you can buy some put protection to protect your downside. If you want to help pay for some of that downside protection, sell an out of the money call option on your stock to help pay for some of that. There's varying ways to go about it. But, yeah, I would not rip the band-aid off at once. Sit down with a good, fiduciary advisor and come up with a good strategy. All right, coming up next, I've got my two cents on a few things to consider when you go over a periodic review of your life insurance. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's spend a few minutes talking about what everybody should do as part of their comprehensive financial plan, I'd say at least every two to three years, and that's just a life insurance review. Brian, let's get into some of the things we should be reviewing. What does a life insurance review actually mean? I think I'd start with step one, as part of your financial plan, determine how much life insurance you even still need given your current goals in your current stage of life, not what was in place 15, 20, 30 years ago.
So, a lot of people never do that. They have these old policies they've had for years or decades. They don't touch them, they don't look at them, and they don't even take a look at, "Do I even still need them?" And a lot of times, Brian, there's a lot of hidden cash value in these policies that could be put to better use elsewhere. So, that's step one. Take a look at whether it's insurance that you actually still need or want.
The other thing, if you're talking about cash value type of policies, and Brian, I find fewer and fewer, I'll call them advisors, even do this anymore, is do what's called an in-force illustration of the policy. Go back to the insurance company and say, "Hey, run an illustration as of today based on the current amount of cash value. And assuming I want to keep this coverage for the next 15, 20 years, what am I going to need to pay out of pocket to keep this thing in force with the current interest rate structure," and then run it a couple of different ways?
What if interest rates go up, interest rates go down? If you're in a variable policy where your cash value is tied to the stock and bond market, you want to look at some variable average rates of return there, too. What we don't want to have happen is someone who really wants to keep life insurance into their 80s or 90s wake up at age 77, 78, and realize their cash value is about to go to zero, which means, unless they start writing humongous checks, their coverage is going to lapse. So, those are a couple things to factor in as you're doing insurance reviews.
I guess the third one would be, if we decide that the life insurance is really not something that's suitable for your current financial plan, there's some things that you can do with that coverage. You can try to convert that into some long-term care type of coverage, maybe a hybrid approach, or avoid the taxes, put it into an annuity, turn it into an income stream. There's a lot of options there. The important thing is to sit down with a good, fiduciary advisor, someone that's not just trying to sell you the next insurance product, but actually customize what you have into your current financial plan based on your current needs. I know you run into this all the time too, Brian.
Brian: Yeah. My absolute favorite thing to do is when we find a policy like this... And most times these things were purchased for good reason. We got babies now, we got a mortgage, and we're going to buy a whole life policy because that's what is recommended to be a good idea. Now, 30 years have gone by, mortgages paid, the kids have their own mortgages, and we just don't need this anymore. So, my absolute favorite thing is to redeploy that into something that doesn't cost a nickel in taxes, but now, will provide long-term care benefits. It's like trading in your old, 13-inch, black and white TV for a 60-inch LED screen and not paying in anything at all. You're just redeploying those assets for a need you have now and getting rid of that need you don't have anymore.
Bob: Yeah, so just, again, make sure you sit down with your advisor and talk about this stuff because there might be some better, more efficient uses for that capital that you've worked so hard to build over the years. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Now, we all like to think we'd spot a scam from a mile away, but what if the scammer looks the part, walks the walk, talks the talk, and even promises to never lose you a dime? Are you really sure your advisor is who they say they are? This is a pretty important segment, Brian, especially stemming from a situation that happened recently in New Jersey.
Brian: Yeah, the SEC has filed fraud charges in federal court against 46-year-old Joel Sofia. No idea if I'm pronouncing that right. But for allegedly opposing as an investment advisor and misleading his clients. What they say he did, that he never registered with the SEC as an investment advisor and never held any securities licenses. You and I both know there's a lot of work that goes into that, not only to get those licenses in the first place, but to maintain them and do all the things you have to do to stay on the good graces of the SEC.
So, they say he falsely claimed decades of professional experience as an options trader, and misrepresented his credentials to, at least, three of his clients. I'm going to guess there's probably more than that. And his pitch was that he guaranteed clients would never lose money. Oh, by the way, this is what you should listen for. If you hear this, run the other way and warn people around you. Guaranteed that clients would never lose money and promoted fake proprietary AI trading software that would supposedly eliminate all risk. You know, Bob, why haven't we signed on for these things, yet? It's so easy that I can't believe that we don't need Andy Stout or his team anymore. What a bunch of clowns. We need some proprietary AI trading software to eliminate risk.
Bob: Proprietary. You and I could come up with a software. We could beat the market all day, every day, and never lose any money. But, hey...
Brian: And make it proprietary and never have to explain how it works.
Bob: Well, and here's the problem, here's the downside here, clients gave him direct access to their brokerage accounts. So, basically said, "Here. Log in." Traded at will. And, you know, he placed thousands of trades on their behalf, no doubt, marked them up for commissions, spreads, what have you. And instead of consistent gains, the option trading caused severe losses, with accounts losing 61% to 89% of their value. And by early 2023, total losses to just these three clients exceeded $1.6 million.
And is usually always the case when stuff like this happens, when investors raised any concerns whatsoever, this guy was nowhere to be found. Or in some cases, he allegedly blamed them, or promised a recovery, and then he stopped calling them back altogether. Brian, we've seen this happen from time to time. You and I have both been doing this a long time. I can remember, one situation here in the greater Cincinnati area with a local insurance agency where the guy was building fictitious statements, and built up a lot of trust with people. I think it was over on the west side of town. I won't get into names.
But I'm sometimes surprised at how few questions people actually ask when they come into the office. I mean, you have a nice office, nice lady at the front desk welcoming you in, free coffee. We got a good monitor on the wall. We look like we know what they're doing or what we're doing, but you still have to ask some basic questions. Let's get into some of that because this is important.
Brian: It is important because Americans report losing $5.7 billion to investment scams in 2024, according to the FTC. Again, that's billion with a B. Think how many 401(k)s and rollovers and life savings and all that are involved there that just went poof. And now, those people are scrambling and living off of, I don't know, welfare, their relatives, their kids, who knows? But since FTC data is based on consumer reports of fraud, we don't really know exactly how much, you know, those are the ones it's caught, and people are willing to admit it. There's a lot of people out there who take losses and don't tell anybody about it. So, we don't know about those. So, the true scope is probably even higher.
And these are some of the words you hear occasionally, but some of these frauds include pig butchering scams, which references the practice of fattening a pig before slaughter. So, in other words, what you're doing is doing probably legitimate things to pull in more and more money by managing it legitimately before the actual scam occurs. You're fattening the pig by getting them to bring in more and more to their account. Then you pull the trigger as the scammer.
So, here's the things you've got to look for. Are you a fiduciary? That's something we mentioned from time to time. And that's what we here are at Allworth 24 hours a day, seven days a week. That is, that's all we do. Every decision we make has to be for the benefit of the client. We have to be able to prove that in a court of law. That's why we focus so much on financial planning. That's the job of an advisor. In my opinion, a fiduciary advisor is responsible to make sure his or her firm, even if it's their own shop and they hang their own shingle, that advisor is responsible to be able to say, "Yes, we know the story of the Johnson family. Here's where their resources are. Here's what they're trying to accomplish. Therefore we recommended X, Y, and Z. That's what being a fiduciary is. Knowing and making those decisions based on the best situation the client can have.
Compensation matters. Is it fee-only? Is it commission fee-based? None of those are particularly evil unto themselves. They're just different ways of doing business, and they have different conflicts of interest in there. But make sure you understand exactly how that advisor is going to get paid to work with you.
Bob: Yeah. And a lot of folks are fiduciaries, but are they fiduciaries all the time? I mean, there's a lot of people that, you know, wear both hats. They're fiduciaries some of the time with their fee-based accounts, but they also offer broker-dealer-based accounts and commission-based accounts. Again, like you said, that's not evil or wrong or doesn't mean you shouldn't do business with one of those folks, but it needs to be disclosed upfront. How are you paid? What's in it for me? Are you acting on my best interests all the time, or just selling me a "suitable" product?
Credentials and background questions. These are important, but I don't think that's the end all be all. I mean, people could go out and take the... Like you and I have, we could still take the DFP, the CHSC, have all these designations, and still be crooked as all get out, right? I mean, you know, there's things like broker check out there, you know, that is a tool that's been created by FINRA, the Financial Industry Regulatory Authority, to research the background and experience of all financial advisors and the firms they're with. But that's really no absolute safeguard that anyone's going to act in your best interest just because they have, you know, 15 letters behind their name.
A couple other things to ask about, just process and philosophy, which I think people do a good job of when they come in, at least, and talk to us. Here's the one I want to spend some time on, and this is a must. You have to have your assets custodian at a reputable custodial firm like a Schwab, like a Fidelity, like a major broker dealer out there. There has to be someone between the advisor and your money who's holding the assets, building the statements, reporting the results, all that. And where most of these fraud cases come in is where this "advisor" is not only making the recommendations, but they're building their own statements, and there's not a good reputable custodial firm in the mix. That is a must have, I think, in today's day and age, Brian.
Brian: Yeah, I think you're right. That is a huge red flag if you... That doesn't mean you have to have heard of the custodian. Maybe you've never heard of them. You're not that close to industry. You might not know who all the players are. But the big ones are Schwab, Fidelity, LPL, and there's a few other big names out there. Doesn't mean the smaller ones are less capable. But the point is, pay attention to it.
This is how Bernie Madoff got away with what he did. He used to be the chair of the SEC, so nobody asked him any questions. They just assumed he was on the up and up. He made up every statement he ever had. And it's an interesting read if you get the book on it and read exactly how he did this, because it's a lot simpler than you might think. What he would do is spread the newspapers out on the floor and he would slide across with a magnifying glass on a rolling office chair. And he would simply look for movement from the day before that would support the fake returns he wanted to put on his statements. And so, it was verifiable. All he had to do is put it on statements and he could say, "Well, yeah, X, Y, Z stock did this, and therefore that was our return."
None of it was real because he didn't actually make the investments because the money wasn't there to begin with. However, there was nobody there to pay attention because nobody asked him any questions. There was no custodian. There was also nobody to ask questions because of that, because the clients simply trusted, "This guy's making me money hand over fist because I have this piece of paper that says so." That's all it was.
These scams are not that hard to pull off. Pick off a couple of people who trust you, and those people will bring you their friends because we just super, super want to believe that there really are these guaranteed, double-digit returns with no risk to principle that just doesn't exist. Turn around as soon as you hear that, you know, and start to warn your friends. Because a lot of times, these guys show up in trusted groups, right? They pop up often in church groups, you know, and other kinds of affinity groups, neighborhood groups, those kinds of things where there's several people in the room who say, "Yeah, this guy's legit," or, "This lady is legit. I trust him, so you should, too." And that's really all it takes to knock our shields down, Bob.
Bob: Brian, I'll share one example of how this is supposed to work. And this is a mistake that I made personally earlier in my career. It was all well intentioned, but the moral of the story is you also need to have a good compliance department behind you. And here was the story. I had a client. You know, we're with a broker dealer. They're getting their statements. And the client would call and say, "I can't understand my statement. I want to see the information this way or that way. Will you just build me a letter once a quarter or something that just tells me how I'm doing relative to the indices and my portfolio and what have you?"
So, in an effort to help this gentleman, I did it. I published a letter. I think it had a spreadsheet and a few columns with it. And I reported kind of, you know, Bob's cliff notes version of his investment statement. And I'll tell you what, within three days, I got my hand not only slapped, but I got levied personally with a pretty big fine from my broker dealer that I had to write a check for. And because I unknowingly broke a rule. And the rule was you never personally report any investment returns to a client. All of those kind of reports have to come directly from the broker dealer or the custodian.
And I learned that lesson, you know, the hard way. But it was a lesson I'm glad I learned because I knew I was with a reputable firm that had my clients back. And there was no way that these clients were going to get deceived or lied to or what have you through me or some other advisor just making up numbers or self-publishing some kind of document. And believe me, I got religion on that whole topic, you know, that day, you know, after writing a fairly sizable check.
Brian: Yeah. One time I had an issue. And nothing similar, slightly different, but an interesting thing that taught me about how important compliance is. I was involved in an email discussion with another advisor at another firm, just somebody I knew personally, and we were griping about something with the SEC. And he made some comment about how the SEC should be banished because of the... He just listed off a bunch of stuff that wasn't true at all. I replied to it was kind of like, "What are you talking about?" And then just kind of shut down the conversation and I let it go after that.
About two days later, I got an email from my compliance department who had been reading those emails because that's their job. And they picked up in the scanner thing because of his reply, which was in my reply when I replied to it. I'm glad they do that, though, because what they're looking for is the bad apples. They're looking for somebody who is communicating in providing guarantees and doing all this stuff. That's why they're reading emails that leave the firm. I'm very glad they did that. But it was just I didn't know they were looking that closely. Because, again, they picked up something that somebody else said, and it simply came up in my reply because his message was pasted at the bottom of it, just the way Outlook does things. So, anyway, I believe compliance is there for a reason, and they sure do a great job of keeping me from having to know the rules.
Bob: Absolutely. Here's the Allworth advice, don't just trust, verify. Ask the tough questions up front, because recovering from a scam is a whole lot harder than preventing one in the first place. Should gold be in every investor's portfolio? There's a new argument out there being made for it. We've got our take on that topic next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast. How do you adjust when your monthly budget and actual spending just don't quite match up? We'll help two local couples figure that out straight ahead at 6:43. That'll be fun, Brian.
All right. We have an opinion piece here in MarketWatch that we came across, and the headline made this blanket statement, "Gold just made the case for why it should be in every investor's portfolio." The article was written by Naeem Aslam. I hope I got that name pronunciation right. He is a chief investment officer at Zaye Capital Markets in London. What do you say about this, Brian?
Brian: Well, let's look at his arguments first, what he's talking about here. Gold just surged past $5,000 an ounce. That's a historic high. That isn't just about inflation or a weak dollar anymore. So, what his argument is, is that gold's rise reflects structural concerns about geopolitical risks, unpredictable policy decisions, and market instability. In other words, he's saying investors aren't buying gold to chase price gains. They're buying gold because they're worried about what might happen.
Now, Bob, I don't know about you, but I think that defines every single time investors have bought gold. It really happens when we have a whole bunch of scary things going on, and then we get the gold brokers that come out of the woodwork who don't care about the value of gold. They're trying to create the transactions because they are the middleman. That's where you start seeing all the commercials and you see all the ads on the internet. And I'm seeing an awful lot of that lately. But again, those shops don't own a bunch of gold that they're trying to sell to you. They're trying to affect the transactions so they can carve off a little piece of it. They're just being brokers.
Bob: Yeah, you make a good point there. And believe it or not, and I didn't know we were going to be doing this segment, yesterday, I listened to a pretty interesting podcast with an interview with Peter Schiff, who is a pretty well-known investment guy. And he actually owns a gold company, a gold broker, among other things. And he was warning folks exactly of the point you just made. We all can flip on cable TV at night and we see these celebrity spokespeople for gold go on and on and on about why you should own gold. And the point Peter was making, and it's a good one, is there are tremendous markups on this stuff.
I mean, these gold companies that advertise all the time, they've got to come up with some money to pay for all these advertisements. And the place they come up with the money is the bid and the ask on these coins or bars or whatever between what they're really worth and what the public is paying for them to say nothing of paying their celebrity spokesperson. So, it is kind of the Wild West out there sometimes. And so, buyer beware if you're just saying, "Well, so-and-so spokesperson who I love, they buy their gold from that particular broker, so it should all be good. And you just dive in headfirst into the pool." Good point that you raised there.
But let's get into the fundamentals of gold itself. I mean, there's a lot of reasons to buy it. But I think, at least, from my standpoint, I look at it as a good long-term play, I think with no more than 5% to 10% of your portfolio just to protect the purchasing power of your money. Because let's face it, ever since 1971, when the United States went off the gold standard, where you could actually trade dollar for dollar currency for the current price of gold, gold has gone up in value by away wider margin than the dollar. And I think gold is a good hedge against inflation in purchasing power.
I mean, silver, let's face it, silver has doubled already, Brian, in 2026. Some of this stuff is getting parabolic right now. There's a lot of people... I liken it in the short term. Now, I'm talking about short-term trading. It's no different than buying NVIDIA. After it goes up 300% and everybody knows about it, they start asking questions. Should I be in it? Well, the big money has already been made. That doesn't mean don't get into gold. But just understand that gold can decline in price. It can fluctuate in price. It's a lot more volatile of an asset than holding currency or cash or what have you, or treasury bonds. So, you just got to look at why you're doing it and over what time frame, I guess, is my look at it.
Brian: Yeah. And I think for those of you who are sitting on the sidelines and thinking, "Well, I don't have any gold. Maybe I should get into precious metals," and all that kind of thing, remember, the time you're doing it, your gut is telling you to look into it at a time where, like we just said, it's all at a historical high. And this is not a question I'm taking from clients very often right now, I think that's because the market is actually holding up pretty well. It seems like it should be a little bumpier than it is with concerns just about everything under the sun at the moment. But right now, remember, all the market cares about, the only opinion the market ever has is, can we make a profit or not? And right now, visibility seems to be pretty good that that is going to continue.
Anything can drive us over the cliff. Remember, we never have declared this soft landing from the COVID recession, but we've just kind of stopped talking about it. So, there's still things out there, there are still challenges to be had, but at the same time, just be calm and rational and decide what you... You know, if you want a little piece in precious metals, that's fine. I have no issue with that. But this is definitely not a time. And I'd say, it's never a time to bet the farm on any one thing.
Bob: Or don't put money that you're going to need in the next one, two, or even three years in gold. It is not a short-term liquidity vehicle. It is a long-term play to protect your purchasing power, and by all means, if you're going to get involved, find or get a referral to a good, reputable, dealer who will treat you right. Everybody's got to make a little money, but the markup should not be that big.
All right. Here's the Allworth advice, should gold be in every investor's portfolio? Sure, it can have a place, but how much and why depends on your personal long-term financial goals. Coming up next, we launch a rescue mission on one of the most overlooked parts of high net worth portfolios, that dreaded, neglected 401(k). You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's be honest, when you hear the words 401(k), you probably think about your very first job out of college. You said it, you forget about it, and you move on. But if you're now worth, let's say, a few million bucks, maybe even more, that first 401(k) or first two or three 401(k)s could be the weakest link in your whole financial plan if you've completely thrown them in the proverbial drawer and forgotten about them. And so, tonight, we're going to go on a little rescue mission. We're going to tell the story of someone who built some real wealth over the course of their career, but never circled back to fix that major blind spot, those old 401(k)s, Brian.
Brian: Well, we're going to talk about Laura. Laura is a fake person. I would say, all of our stories we share here are real stories that come from real clients, but obviously, names are changed to protect the innocent. And today, the innocent's fake name is Laura. Laura is 58, she's married with two grown kids, and she owns a marketing firm in Cincinnati that did really well in her 40s. And today, she and her husband have a net worth of about $3.2 million, including some real estate, brokerage accounts, growing cash reserve, typical assets for somebody in that kind of a position, and life is good.
But she came out to me with a financial advisor. And during that whole review, what stuck out was a 401(k) that was a $480,000 account. That's a significant chunk of her net worth. It's still 100% in a 2035 target date fund. Really no customization, and no real... It looks like there hadn't been any discussion of this account really at all, because she was busy building her business, and that's where their net worth was. So, now, that wound up being a half million dollars that could have been handled a lot differently. For example, she's in a position where she's got a decent amount of assets sitting there outside the 401(k). That's what they're going to rely on to live off of in the earlier years of retirement.
That means that these accounts, the tax advantage ones, a couple things, nobody had had a conversation with her about should this stay in the traditional side, should we be thinking about Roth conversions here after you retire, and more importantly, should it really be in a 2035 target date fund? That is not that far out. And if these assets are going to sit there for maybe 20 years or longer, or possibly just be inherited by your kids, then that is a very, very different strategy. That's really where we're talking about Roth conversions. But again, it sat there in the same fund that she had decided when she first set the thing up when the business was barely off the ground and hadn't thought about it ever since, because she worked so hard.
The end result, it underperformed the market by about 2% every year over the past seven years because it was targeted for a risk tolerance portfolio that really didn't match what she needed. Now, is this going to bankrupt her? Of course not. But this is a question of efficiency. When you look at it in the context of her wealth, that's a big hole in the boat, Bob, because she left a lot of money on the table over those years for an asset that most likely is going to sit there for several decades until it gets inherited.
Bob: Yeah, I think the important thing here is just to make sure when you sit down with your advisor, you are talking about all of your assets, and you actually know what you have and where it's sitting. I mean, sitting in a 2035 target date fund isn't the worst thing in the world. I mean, the thing got probably a pretty nice return over the period that this person was ignoring it.
I came across a situation late last year which was a bit more dramatic than that. These folks had sold a business for quite a bit of money, and they were very, and are very risk averse people. They want to be almost 100% in bonds, maybe a 10% to 20% slice in the stock market just for some inflation protection. And I asked them about these couple old 401(k) accounts that they had. They hadn't looked at them in 15 years. And I said, "Well, why don't you send the statements and we'll look at it." Well, they sent the statements, Brian, and they were 100% invested in the stock market, and they were in a variable annuity.
Not only was the risk profile completely different from where these people wanted to be today as they progress through their retirement years, but when you ran a fee analysis on the whole thing, they were paying very, very high fees, upwards of about 3% all in on these annuities. So, yeah, in some cases, it makes sense to leave the money at the 401(k) if it matches what you're trying to do and you can get the investments for low cost, but in a lot of cases, it's not the case. This was one example where it was just a no brainer for multiple reasons that I've already covered to just consolidate this over to the assets that we were handling for them, and they were glad we had the conversation.
Brian: Well, that's good to hear. And that's the whole point of that entire type of a discussion. Just to make sure that you understand what you own. One of the interesting phenomenons we see every now and then is, we take people through this risk discussion, they'll say that they're super conservative people, and then like you just said, we look at the portfolio and it's invested really, really aggressively. And oftentimes, they'll show us this, and they won't have reacted to 2022, which was, as I always say, one of the five worst market years we've ever had. And it's like, "Are you really this risk averse? Because it didn't appear to have bothered you that 2022 came out the way it did." So, it's almost like sometimes those risk questionnaires are more of a, "Here's where I think we should probably be, but we're really okay not being there." So, that's why risk is a discussion, not just a questionnaire. But that's still an important thing for you to talk about with your advisor to make sure everybody's on the same page.
Bob: Here's the Allworth advice, if you've built some real wealth, you can't afford to just let those old 401(k) plans lay around and coast. It deserves the same level of scrutiny and customization as everything else in your plan. All right, can you afford to give your kids, let's say, $25,000 each for a house down payment and still retire comfortably. We'll dig into that question from Loveland next, plus whether an $8,000 a month retirement budget really holds up over the long haul. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question and it will come straight to us. All right, Brian, Greg in Madeira says, "I'm worried that one bad year early in retirement could change everything for us. What practical steps can you take to protect against that without parking everything in cash?" Great question.
Brian: Well, Greg, you're talking about something called sequence of returns risk. And the reason this is so dangerous, it's timing, not the long term averages. So, a poor market year, like you said, in the first few years of retirement can permanently shrink that capital base you're drawing off of, even if markets recover later as they always have in the past. The solution is not to walk away from growth because this can happen. It's to separate the income I need now from the money that can grow over time.
So, really what that looks like, maybe somewhere between a giant cash pile and no cash pile at all. Build that retirement paycheck buffer. I always suggest, look at the things you're going to need to spend money on. You know the bills that are coming due over the next 12 to 24 months. The good idea would be to make sure that that particular pile of cash is sitting somewhere safe, generating a little bit of interest, but its job is to be spent to pay those bills. That means that if the market does go the wrong direction early in retirement, it doesn't hurt you because you weren't going to spend those particular dollars anyway.
And you can also take this a little further by looking at and segmenting your dollars into buckets. Maybe the first bucket is money you're going to need between now and three years. That's really liquid. You know, again, you're looking for money markets, high yield savings accounts, those kinds of things, maybe a CD. Second bucket for 4 to 10 years, which would be a little maybe like a balanced fund, you know, inflation-protected assets, those kinds of things. Then, of course, your 10 years and out bucket, that's the long-term growth money that's going to be pretty heavily invested toward the stock market side. So, just be thoughtful about when these dollars are due. And you don't have to invest every single dollar the exact same way if these are concerned. So, I hope that helps.
Ron in Marymount. Ron says they need about $110,000 to live comfortably. And he's wondering how much of that should come from dividends, interest versus selling investments, especially in a down market.
Bob: Well, Ron, I would first say, you know, don't let the proverbial tax tail wag the dog, meaning that you should build a financial plan based on your personal goals and your investment risk tolerance, and then set your asset allocation accordingly. Once that's done, you know, like you said, if you've got money coming in from dividends and interest, from bonds or some dividend paying stocks, you know, those are going to be pretty consistent. The other thing to look at, you know, if we're talking about selling investments or using capital gains, you want to try to get as much control over those capital gains as possible. Meaning, have some type of tax loss harvesting or tax smart investing going on, you know, in your non-IRA accounts so you have some control over capital gains and when those are generated. Versus just waking up in the fourth quarter of the year and being surprised when you get a capital gain distribution.
Obviously, from your question, I don't know how much of your assets are in IRAs versus, you know, taxable accounts. That's a big part of this whole discussion too. So, I think, you know, sit down, build your plan from an allocation standpoint, and a good fiduciary advisor can take your plan. And then also, apply some tax smart strategies to it as well to make sure that we're pulling money from the right places without triggering unnecessary taxation. Hope that helps.
All right. Alan in Loveland says, "We want to give our kids $25,000 each toward home down payments. How do I evaluate, Brian, making those gifts against our long term plan instead of just going with our gut and giving the kids the money?"
Brian: Yeah, you know, this is really the core of financial planning, right? So, I know I've got money now and I can do whatever I want to do with it. But my question is, what's that impact in the future? Can I get away with this now or is this going to hurt me, you know, 10, 15 years down the line? So, think of it in terms of retirement income. A permanent $25,000 gift is probably about 1,000 to 1,200 bucks a year of lifetime spending you're giving up. And if you got two kids going on now, you're thinking $2,000 to $2,500 per year for the rest of your life.
So, now, you're thinking, this is different from, "Can we spare the cash?" To now you're thinking, "Are we comfortable trading this much future spending for this outcome?" And then you're also gonna look at what dollars that you're using for. If this is coming from your own excess taxable assets, then that risk is usually pretty manageable, not too painful. But if you're going to be taking this out of tax-sheltered accounts, you know, Roth IRAs, traditional IRAs, that's going to be income taxable and/or you're sacrificing that tax free growth, that'll have a bigger impact on it. And then I would also stress, test the timing of it. What if markets fall 20% right after we make the gift? Well, hopefully, you've already got a financial plan in place where you can easily do this, model this out, and then pretend the market takes a hit.
But on the other hand, we don't know when you're talking about doing this. You didn't give us the age of your kids. They might be 10 years old. We're talking 15 years from now. You're thinking way ahead of time. It could be this Christmas, you're going to do it. Who knows? But in any case, what I would look at is, what have your investments done recently? Because very often, if the market has had a positive run, you might be able to do these gifts with money you didn't have a few months ago. If that's the case, oftentimes I say, you know, as long as the plan floats, take the windfall that you found from that recent market performance and do the things that you want to do for your family. So, it's not about affordability, it's about intentional trade-offs. If you'd still be comfortable with that decision after a bad market year, it fits the plan. If you wouldn't, change the size, the timing, or maybe the source of that gift.
We got one more for Tony in Newport. And Tony's asking about a single stock. He's got one worth over a half million dollars, and it's about 25% of their portfolio. He said he's concerned that if he sells it all, he's going to owe about $90,000 in capital gains. And he's wondering if it's smarter to spread that out over the years, or just tear the band-aid off and write the check and smile.
Bob: Well, Tony, if you can help it, we don't want to just rip the band-aid off and write a $90,000 check. Usually, there's some better ways to go about this. But 25% of your overall net worth is a bit high, and we want to try to get that down, you know, under 10 if we can, but do it responsibly. So, we got to take a look at your overall tax situation, what your income goals are. Just as a reminder, up to $96,000 and change of taxable income, you don't pay any capital gains taxes. So, you might be able to, to use your words, rip some of the band-aid off this year, spread it over a couple of years, and maybe gradually move down out of that position without paying any taxes at all.
But the other option is you can literally use options. Meaning you can buy some put protection to protect your downside. If you want to help pay for some of that downside protection, sell an out of the money call option on your stock to help pay for some of that. There's varying ways to go about it. But, yeah, I would not rip the band-aid off at once. Sit down with a good, fiduciary advisor and come up with a good strategy. All right, coming up next, I've got my two cents on a few things to consider when you go over a periodic review of your life insurance. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Let's spend a few minutes talking about what everybody should do as part of their comprehensive financial plan, I'd say at least every two to three years, and that's just a life insurance review. Brian, let's get into some of the things we should be reviewing. What does a life insurance review actually mean? I think I'd start with step one, as part of your financial plan, determine how much life insurance you even still need given your current goals in your current stage of life, not what was in place 15, 20, 30 years ago.
So, a lot of people never do that. They have these old policies they've had for years or decades. They don't touch them, they don't look at them, and they don't even take a look at, "Do I even still need them?" And a lot of times, Brian, there's a lot of hidden cash value in these policies that could be put to better use elsewhere. So, that's step one. Take a look at whether it's insurance that you actually still need or want.
The other thing, if you're talking about cash value type of policies, and Brian, I find fewer and fewer, I'll call them advisors, even do this anymore, is do what's called an in-force illustration of the policy. Go back to the insurance company and say, "Hey, run an illustration as of today based on the current amount of cash value. And assuming I want to keep this coverage for the next 15, 20 years, what am I going to need to pay out of pocket to keep this thing in force with the current interest rate structure," and then run it a couple of different ways?
What if interest rates go up, interest rates go down? If you're in a variable policy where your cash value is tied to the stock and bond market, you want to look at some variable average rates of return there, too. What we don't want to have happen is someone who really wants to keep life insurance into their 80s or 90s wake up at age 77, 78, and realize their cash value is about to go to zero, which means, unless they start writing humongous checks, their coverage is going to lapse. So, those are a couple things to factor in as you're doing insurance reviews.
I guess the third one would be, if we decide that the life insurance is really not something that's suitable for your current financial plan, there's some things that you can do with that coverage. You can try to convert that into some long-term care type of coverage, maybe a hybrid approach, or avoid the taxes, put it into an annuity, turn it into an income stream. There's a lot of options there. The important thing is to sit down with a good, fiduciary advisor, someone that's not just trying to sell you the next insurance product, but actually customize what you have into your current financial plan based on your current needs. I know you run into this all the time too, Brian.
Brian: Yeah. My absolute favorite thing to do is when we find a policy like this... And most times these things were purchased for good reason. We got babies now, we got a mortgage, and we're going to buy a whole life policy because that's what is recommended to be a good idea. Now, 30 years have gone by, mortgages paid, the kids have their own mortgages, and we just don't need this anymore. So, my absolute favorite thing is to redeploy that into something that doesn't cost a nickel in taxes, but now, will provide long-term care benefits. It's like trading in your old, 13-inch, black and white TV for a 60-inch LED screen and not paying in anything at all. You're just redeploying those assets for a need you have now and getting rid of that need you don't have anymore.
Bob: Yeah, so just, again, make sure you sit down with your advisor and talk about this stuff because there might be some better, more efficient uses for that capital that you've worked so hard to build over the years. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.