Thanks to my dad, homeless camps, and sack lunches, I grew up learning the importance of having a plan.
My father is a pastor and he sees helping the homeless as a mission. So, on Saturday afternoons, my family would prepare 125 bags of lunches whose contents are still etched in my memory—a Bologna sandwich, a bag of crisps, and a little Debbie.
We would get up at 6am on a Sunday morning, pack bags of lunch into a van, and head to a park where homeless people are camping. We distributed snacks there. There were no strings attached to the sack lunch, but my dad took the opportunity to invite people to church and offer a hot lunch to anyone who accepted the invitation after the service.
This made the journey from homeless camp to church memorable because my dad always asked people to tell him stories of how they ended up in luck. As the miles clicked, I listened. Some people were once successful but unprepared for a stock market crash that would bankrupt their finances. Others struggled after the death of their spouse. Regardless of the story, a common theme emerged: They had no plan to take the most brutal turn in their lives, and that was their downfall.
These stories impressed me and taught me a lesson: life can happen to anyone at any time.
Whether we like to admit it or not, if we don’t have a financial plan that will get us through the ups and downs, it’s true for you and me. We all face plenty of risks in life, but your plan should address at least three of them: tax strategy, investing, and longevity.
It’s common for people to owe money on credit cards, mortgages, and auto loans. But many people retire without realizing that their biggest creditors may not be one of them. Instead, it could be the IRS.
That’s because the bulk of most people’s retirement savings is easily held in a traditional IRA, 401(k), or other tax-deferred account. But when you start withdrawing that money, things get uncomfortable because that’s when the tax is due. And, over time, the funds in these accounts have increased, which means that taxes owed have increased with it.
We’ve seen that individuals are able to pay far less than they think they must by employing tax strategies that help soften the blow of the now larger tax burden. That’s 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 account to about $1.1 million, they might think that’s fine — until we really understand their potential tax liability. Over time, they may pay $500,000 or more in taxes. Obviously, this changes the situation, but what can they do? We discuss converting money into a Roth account. Roth accounts grow tax-free, and you don’t pay any tax on withdrawals (as long as you’re at least 59½ years old and have held the Roth account for at least five years). You do have to pay taxes when you convert to Roth, but we’ve seen many times that it can be much less of a case than if a client chooses not to convert.
This could be a good time to make a Roth conversion, as taxes are at their lowest levels in history. That may not last, though, as the 2017 Tax Cuts and Jobs Act brought those low rates, which will end by the end of 2025.
Everyone has heard about the importance of diversity. But a lot of times, people don’t really spread their assets – they just distribute them. They may invest in a variety of stocks, but variety alone does not limit the risk to your portfolio from market volatility.
Instead, you are looking for different levels of risk. For many people seeking diversification, part of their portfolio should be active, invested in stocks or exchange-traded funds (ETFs). That’s where you can enjoy the biggest gains, but also the risk of the biggest losses. You may also want to put another portion of your funds into low-to-medium-risk investments, such as bonds or real estate. Finally, you should keep your funds in a place that is not affected by the market, such as money market accounts, CDs, or fixed index annuities.
On the surface, longevity doesn’t sound like a risk. Longevity is a good thing, right? But the risk here is that you can outlive your money. Many of the clients I see are baby boomers who have been taught to retire with a three-legged stool — Social Security, savings, and pension.
For many, pensions are a thing of the past, and all that remains is two rickety legs on which the figurative stool balances precariously. Social Security can struggle to keep pace with inflation, so personal savings can take on a large part of the responsibility for keeping retirees balanced. With this in mind, we help guide clients to use at least a portion of their personal savings to create their own pension, such as a fixed indexed annuity. This creates an income stream that could see them retire. We also use long-term care or income-paying accounts that have some type of rider, such as indexed universal life.
The first step in developing a financial plan is to discuss your goals and concerns with your advisor. In addition to tax strategies, investments, and income, you may also want to discuss health care and inheritance.
Your advisor should then design a written plan for you that addresses these issues and helps you achieve your goals. After that, I recommend meeting with your advisor at least once a year so the two of you can review the plan and decide if it needs to be revised as circumstances change.
Remember, life can happen to anyone at any time. A bologna sandwich, a bag of chips, and a little Debbie might be a great lunch, but a strong financial plan is even more nutritious for the long journey ahead.
Ronnie Blair contributed to this article.
Williams Financial Group, LLC is an independent financial services firm that uses a variety of investment and insurance products. Investment advisory services provided only by individuals duly registered through AE Wealth Management, LLC (AEWM). AEWM and Williams Financial Group LLC are not affiliates. 1271539 – 4/22 All investments involve risk, including potential loss of principal. No investment strategy can guarantee profits or prevent losses during periods of decline in value. Any reference to guaranteed or lifetime income generally refers to fixed insurance products, not securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims ability of the issuing insurance company. Remember, converting an employer plan account to a Roth IRA is a taxable event. Roth IRA conversion of increased taxable income can have a variety of consequences, including (but not limited to) the need for additional withholding or estimated taxes, loss of certain tax deductions and credits, and loss of Social Security benefits and higher Medicare imposes higher tax premiums. Always consult a qualified tax advisor before making any decisions about your IRA.
Founder of Williams Financial Group
Stacia Williams is the founder and wealth advisor of Williams Financial Group. She helps clients achieve their retirement goals and dreams through thoughtful financial strategies. Williams’ broad background in working with individuals across socioeconomic and cultural divides helps her firm provide holistic and culturally relevant services to clients.
The presence in Kiplinger was obtained through a PR program. The columnist had the help of a PR firm in preparing this article for Kiplinger.com. Kiplinger received no compensation.