An interesting thing happened while I was taping the “Free Money Radio Hour” this week (every Sunday at noon on WCAP, Lowell). We were talking about the recent decline in the market that had been triggered by last week’s interest-rate hike. As we were talking, I revealed I was unaware of that whole thing.
For a brief moment, I felt embarrassed and was tempted to edit it out. But then, that would have been cheating, so I decided to leave it in. The truth is, I hadn’t been paying attention to what was going on in the market. Frankly, I often don’t, sometimes for weeks at a time, and it was slightly embarrassing to have that out on the radio. I am, after all, a Free Money Guy.
How, then, can I claim to be a financial planner if I am not closely monitoring daily market activity or interest rates? Because good financial planning really has little to do with today’s interest rates or market valuations, or anything else going on in real time, except perhaps tax rates.
Good financial planning isn’t about today or last week. It is about the future. Yogi Berra famously said, “It’s difficult to make predictions, especially about the future.” And that’s what makes a good planner — the ability to predict the future. And I can. Here, let me show you. Here are several predictions I make routinely in my practice.
- Taxes will go up before they go down, and your retirement assets will be targeted.
- You will pay way more in fees than you know or can believe.
- The market will crash again in the future, and indeed in your lifetime, if you live long enough.
- Interest rates will rise, causing the bond and stock markets to correct.
- Inflation is not dead; the U.S. government depends on it.
- Congress will do something that will completely mess with your retirement plan, in a bad way.
- And my bonus prediction: Unless you are one of the mega-wealthy, no matter how much money you’ve socked away for retirement, you will never feel like it’s enough.
- Certainly, good financial planning involves understanding that interest rates do rise, markets do decline and sometimes crash, and the two are often connected. It involves positioning my clients so they are prepared for it when it happens. For my clients, last week was just a blip, if that. Most, like their vaunted financial planner, were probably not even aware of it.
So, if you are a financial adviser, you know something will happen in the future, and you know it will impact a significant number of your clients. What does it say if you just let them deal with it and don’t prepare them for it? And how can you tell if you are prepared?
Let’s take the first three predictions. Taxes will go up at some time in the future. And they will go up before they go down. How do I know? Because our U.S federal national debt is more than $28 trillion, and the balance of untaxed retirement funds is well over $20 trillion. Like Willie Sutton once said when asked why he robbed banks, “It’s where the money is.”
So, if we know taxes will go up, and we keep putting you into tax-deferred accounts, what good are we? Especially when there are viable alternatives that can save you thousands in taxes? Now I understand why they do it. Like I said, there is over $20 trillion in tax-deferred retirement accounts. Average fees on those accounts run between 2% and 5%, depending on what type of investments are held. Much of that is hidden. If you take just the low end of that, it means the financial industry is taking at least $400 billion a year out of these plans. Why do you think buy and hold is so important to the financial industry? It’s more like, buy and pay.
And there are things you can do about it. Fund a Roth IRA instead of a traditional IRA. If you have a 401(k), find out if there is a Roth component. Even if you are a high earner, Roths can be utilized as there is no limit on the amount you can convert. And remember, every dollar you pay taxes on now can produce as many as 15 or more tax-free dollars in retirement.
The market will crash again in the future, and indeed in your lifetime, if you live long enough. I know this to be true, and more than likely, so do you. And when it does, unless you have a stomach made of iron, you will be sorely tempted to do some dumb things. How can you avoid dealing with that?
First, determine your comfort zone based on our patented risk-tolerance analyzer. We will use that information to construct a portfolio that will stay within your risk tolerance 95% of the time. Then we create an investment policy for the 5% of the time it jumps the track. You make these plans now, when markets are good and you aren’t under a lot of stress. That’s really the only time you can make good decisions.
Second, move your income-generating money out of the market and into an income-producing instrument, like a hybrid annuity. A hybrid annuity is a contract that provides the best advantages of a fixed annuity, a variable annuity and an immediate annuity, without their disadvantages. Like a variable annuity, it takes advantage of market increases, but unlike a variable annuity, protects you from market losses. It provides the CD-like safety of a fixed annuity, but still has the potential for greater gains because it is tied to the market index. And third, managed properly, it may provide double or more the lifetime guaranteed income you can get from traditional retirement assets, without having to surrender the cash value of the annuity so any unspent money can go to your heirs.
Taxes, fees and market losses handled by acknowledging they will happen, and choosing to not participate.
Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, N.H., he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die and I’ll Tell You How Well You Can Live,” which deals with the problem that unknown lifespans create for retirement planning. His books are available on Amazon.com. His radio program, “The Free Money Guys,” can be heard every Sunday at noon on WCAP. He also conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at https://ift.tt/2WM4TSf.
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