I I learned the importance of having a plan at an early age from my dad, a homeless camp and packed lunches.
My father was a pastor and he considered helping the homeless a calling. So on Saturday afternoon, my family would cook 125 bagged lunches, with the contents of those lunches etched in my memory to this day – a bologna sandwich, a bag of potato chips and a Little Debbie.
We got up at 6 a.m. on Sunday morning, loaded the packed lunches into a van, and drove to a park where homeless people were camping. There we distributed the treats. Sack lunches came with no strings attached, but my father took the opportunity to invite people to church, granting a hot lunch after the service to whoever accepted the offer.
It made for memorable trips from homeless camp to church, as my dad always asked people to tell him their stories of how they failed. Over the miles, I listened. Some people had succeeded at one point, but were unprepared for a stock market crash that left their finances in shambles. Others have gone through difficult times after the death of a spouse. Whatever the story, a common theme emerged: they had no plan to withstand life’s cruelest twists, and that was their downfall.
These stories stuck with me while teaching me this lesson: life can happen to anyone, anytime.
Whether we like to admit it or not, it’s true for you and me if we don’t have a financial plan that will get us through the ups and downs. We all face many risks in life, but your plan should address at least three of these risks: tax strategy, investments, and longevity.
It’s common for people to owe money on credit cards, mortgages, and car loans. But many people come to retirement not realizing that their biggest creditor may not be one of them. Instead, it can potentially be the IRS.
That’s because much of most people’s retirement savings are tucked away comfortably in traditional IRAs, 401(k)s, or other tax-deferred accounts. Things get uncomfortable, however, when you start withdrawing that money, because that’s when the taxes are due. And, over time, the money in those accounts has grown, which means the amount owed in taxes has grown with it.
We have seen cases where individuals have been able to pay significantly less than they thought they would have to pay by employing a tax strategy that helps soften the blow of a now heavier tax burden. This is why we discuss potential tax liability with our clients; it’s an important part of overall financial health, especially in retirement.
Take this hypothetical example. If a client has increased their tax-deferred accounts to around $1.1 million, they may feel pretty comfortable – until we actually look at their potential tax liability. Leaving the money as is, over time they could potentially pay $500,000 or more in taxes. Obviously, this is a game changer, but what can they do about it? We are discussing converting money into a Roth account. Roth accounts grow tax-free, and you pay no tax when you make a withdrawal (as long as you’re 59½ or older and have held a Roth for at least five years). You pay tax when you convert to Roth, but we’ve seen many times that this can be considerably less than if a customer had opted out of the conversion.
Now might be a good time to do a Roth conversion, as taxes are at some of their lowest levels in history. That might not last, however, as the Tax Cuts and Jobs Act 2017, which brought these low tax rates, expires at the end of 2025.
Everyone hears about the importance of diversification. But too often, people don’t really diversify their assets – they just allocate them. They can invest in a variety of stocks, but variety alone does not limit the risk market volatility poses to your portfolio.
Instead, what you’re looking for are different levels of risk. For many people looking for diversification, part of their portfolio should be aggressive, invested in stocks or exchange-traded funds (ETFs). This is where you can enjoy the biggest gains, but also risk the biggest losses. You may also want to put another portion of your money in moderate to low risk investments, such as bonds or real estate. Finally, you should have money set aside where it is not subject to the vagaries of the market, such as money market accounts, CDs or fixed index annuities.
At first glance, longevity does not appear to be a risk. A long life is a good thing, right? But the risk here is that you may outlive your money. Many of the clients I see are baby boomers who have been taught to have a three-legged stool in retirement – social security, savings, and a pension.
For many people, pensions are a thing of the past, leaving this metaphorical stool poised precariously on the two remaining shaky legs. Social Security may struggle to keep up with inflation, so personal savings may bear an inordinate share of the responsibility for keeping the retirement stool balanced. With this in mind, we help our clients to use at least part of their personal savings to create their own pension, as with fixed index annuities. This creates a stream of income that can accompany them throughout their retirement. We also use accounts that have some type of rider to cover long-term care or have an income payout, such as indexed universal life insurance.
A good first step in creating your financial plan is to talk to your advisor about your goals and concerns. In addition to tax strategy, investments, and income, you may also want to discuss health care and inheritance.
Next, your advisor should design a written plan for you that addresses these concerns and helps you achieve your goals. Thereafter, I recommend that you meet with your advisor at least once a year, so you can both review the plan and decide if it needs to be revised due to changing circumstances.
Remember that life can happen to anyone at any time. A bologna sandwich, a bag of chips, and Little Debbie might make for a great sack lunch, but a solid financial plan is more nourishing for the long journey ahead.
Ronnie Blair contributed to this article.
Williams Financial Group, LLC is an independent financial services company that uses a variety of investment and insurance products. Investment advisory services offered only by persons duly registered through AE Wealth Management, LLC (AEWM). AEWM and Williams Financial Group LLC are not affiliated companies. 1271539 – 4/22 All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in times of falling values. Any reference to guarantees or lifetime income generally refers to fixed insurance products, never to securities or investment products. Guarantees for insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company. Remember that converting an employer plan account to a Roth IRA is a taxable event. The increase in taxable income from the Roth IRA conversion can have several consequences, including (but not limited to) a need for additional tax withholding or estimated tax payments, loss of certain tax deductions and credits, tax, and higher taxes on Social Security benefits and an increase in Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
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