Your Money, Your Future, and the Virus – 5 Action Steps to Take
This month I wanted to address the huge issues that have and will impact our financial futures created by COVID-19. The discussion is not pretty but the opportunities are huge.
The substantial decline in the Stock Market, the loss of jobs, and the limitation to our physical freedom is creating setbacks to everyone’s financial goals.
People have lost 3 vital elements of their Wealth:
- Money – a decline in the value of their accounts means that many of them have actually lost money. This is most recognizable when people decide to get out or reduce their exposure to the market. The moment they sell they have created an actual loss of money.
- Time – The key element to creating a growing pool of money is Time. Like starting on a cross-country road trip, if you head the opposite direction to your intended destination you find yourself farther from your goal. And, you have lost the time it takes to backtrack. The only way to make up for lost time is take more Risk.
- Compounding – this is the element of money that really energizes results. At a certain interest rate and over a certain period of Time, money will double and double and double again. The loss of Time and the loss of Money creates the stagnation of the Compounding results people are hoping for.
The impact of the loss of these 3 elements is that people will have to do one or maybe all four of the following:
- Invest more than they had planned and end up reducing their current Lifestyle
- Take greater investment Risks to try to recover the values they have lost
- Continue working to an older age to rebuild the values of their account and at the same time have fewer years of retirement that they need to fund.
- Agree to living a lower retirement lifestyle for their remaining years
If that all does not seem bleak enough, there is one more element that we must address – Taxes.
As a Country, we have been on a spending spree that has continued to grow our National Debt at an alarming rate. There seems to be no restrictors on the increased outflow of money our Federal, State and Local governments are willing to spend.
Now the Federal government, along with the Federal Reserve, have allocated a reported $5,000,000,000,000 (that is TRILLION) to aid in the COVID-19 economic stimulus. Since the US National Debt is already $24,000,000,000,000. How does it get repaid? Who is most likely to have to pay it and how?
The answer is simple. You and I will be paying for this with higher taxes and through the reduction in the value of the dollar.
I know it seems like we pay taxes on everything, yet it may surprise you that the Trump tax plan gave most of us the lowest income tax brackets in our working careers. Income taxes are on sale!
So, what do we do? Here are the 5 action steps:
1. Take advantage of the lower income tax brackets before they expire. Assuming taxes will be higher when you start using your money for retirement income, why would you postpone the taxes by making contributions to a pre-tax 401(k) or IRA? The exception would be to contribute the minimum to get your employer’s matching contribution.
2. Look at how to start accumulating money in financial vehicles that can provide tax-free income at retirement. No, your tax-free bonds are not totally tax free. Their income can cause an increase in your Social Security taxation.
There are only 2 possibilities that are totally tax-free: Roth IRA/Roth 401(k) and Cash Value Life Insurance.
3. There is a lot of advice out there about doing Roth conversions now while account values are down. This may be a viable idea but the need to have separate cash now to pay the tax on the conversion may exclude most people from making this move.
A much more viable solution may be establishing a Roth Conversion Later strategy, using the leverage of tax-free insurance proceeds to pay the conversion tax and leaving the new Roth account tax-free to the future beneficiaries. We can model this strategy to see if it right for you.
4. As you have heard me preach before, Cash Value Life Insurance is the most misunderstood yet most powerful of the financial vehicles available, if you can medically qualify. Start storing wealth in a properly-designed life insurance policy. You will have liquidity, tax-deferred growth, tax-free income and a tax-free legacy for your family.
5. Most importantly, you must put a plan in place to maximize your Retirement Income Potential. If you are accumulating all your assets for retirement in stocks, bonds, mutual funds, investment real estate, you have a retirement savings/investment plan.
You do not have a Retirement Income Plan!
Your money plan for a COVID-19 world, in summary:
Creating the highest retirement income potential is not about having the largest account value at retirement. It is having the highest income stream so you can maintain your lifestyle and never run out of money. This takes specialized planning.
If you want help with that, give me a call and I can provide professional advice and strategy.
We have huge opportunities to flourish ahead of us. Please stay safe, healthy, and optimistic.
Gary Pevey, CLU ChFC