Published in the April 4 – 17, 2018 issue of Gilroy Life

American journalist David Wessel once said, “nobody really knows what the market is going to do, but it sure looks like we are going to have a lot more volatility.”

While the presence of market volatility is always variable, volatility tolerance is something that almost always declines with age. The variance is based on a person’s age and risk tolerance.

For some, a volatile market means there is an opportunity for substantial returns. We advise that investors proceed with caution as timing the market can be risky, and most people are not day traders. Lately, we’ve been receiving more calls from clients and other individuals looking for advice on how to better protect their accounts from substantial market losses as they inch closer to retirement. When we look at protecting our clients from market losses, we focus on asset allocation that safeguards market losses and future tax hikes which are imminent.

Clients and the public are starting to see that they have been fooled by the U.S government. By buying into the ideology of being in a lower tax bracket during retirement, many are unaware of the implications their planning will have on their lifestyle during retirement. With our country more than $20 trillion in debt, social security increases not keeping up with the 3 percent annual cost of inflation, and medical inflation of roughly 6 percent each year (double annual inflation), many retirees are in for a rude awakening. This is especially true when you examine taxes here in California.

The Congressional Budget Office predicts the highest federal tax rates will be 55 to 60 percent by 2025. A couple years ago California state taxes increased by almost 150 percent from 9 to 13 percent. This leads us to believe one major truth about our future; the public can expect to see tax hikes across all income brackets coming down the road.

Like most people, you’re reading this and probably wondering, “how do I plan for the future when so many factors are unknown? And also, ‘how do we avoid future taxation so that we do not outlive our retirement savings?’

We find most clients do a decent job of accumulating wealth using long-term investment strategies, but when it comes to distribution at retirement and balancing risk, they are often met with different challenges like the ones in the questions above. Of the wide array of financial planning tools available, there are currently only three vehicles that ensure no taxation on the growth of your investment. These are Roth IRA/Roth 401k, Municipal Bonds, and Life Insurance. All three can be sound planning vehicles for a portion of a person’s retirement portfolio but they must be tailored to meet the risk tolerance of the client. We encourage clients to become educated on the advantages and disadvantages of each vehicle. Too often are we seeing portfolios that have a substantial percentage of retirement savings in qualified (taxable) vehicles like IRAs, 403Bs, 401ks, and TSAs. While these vehicles can be good for accumulation of retirement savings, the forecast for future taxation means that many may be paying a considerable amount more in taxes than they had once planned on paying.

In planning for avoiding future taxation and having savings you won’t outlive, many are converting taxable money to non-taxable by simply paying the taxes now knowing they will not be taxed down the road. By pairing the liquidation of taxable accounts with tax-advantaged vehicles and distribution strategies that coincide with current tax and estate tax laws, one can better address the unknowns in later years of life. In addition, safeguarding retirement savings against market risk with vehicles that guarantee no losses is also a vital component of success during the distribution phase of retirement planning. In summary, we encourage everyone to evaluate their strategy as policies change. Keep in mind, shifts in political party power will affect taxes and help determine which accounts you’ll want to tap into first during retirement. Make sure you have a strategy that includes both taxable and non-taxable investments. Not outliving your savings may depend on it!

To learn more about strategies tailored to your needs, please contact our office at (408) 767-2572.