Your Retirement … with Brian and Bob: Predicting the future is impossible, but protecting your assets is not

Published in the August 23 – Sept. 5, 2017 issue of Gilroy Life

Abraham Lincoln said, “You can fool some of the people all of the time, and all of the people some of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” This universal truth can be applied to relationships both business and personal with people from all walks of life.

When we look at protecting ourselves from future taxation, whether we’re discussing estate taxation or taxation of retirement accounts, the playing field is constantly being changed. Even with the future being uncertain, there are ways to protect yourself against the unknown but you must plan with caution.

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 on their lifestyle during retirement. With our nation roughly $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 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 information 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.

So you’re probably wondering, How do you plan for the unknown while proceeding with caution? And also; How do we avoid future taxation so that we do not outlive our retirement savings? We find most clients do a respectable 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 be educated on the advantages and disadvantages of each vehicle. Too often are we seeing retirement 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 maybe paying a considerable amount more in taxes than they had once planned on. In planning for avoiding future taxation and having retirement savings you won’t outlive, many are converting taxable money to non-taxable by simply paying the taxes now knowing that they will not be taxed further 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 current planning strategy every few years as policies change and power shifts between the republican and democratic parties.

Make no mistake, when the markets are doing well, republicans and democrats are both happy because your money in qualified accounts gives them more taxable income at a higher rate as time passes.

Bob Price and Brian Harrigan are the owners of Executive Plan Design. For a free consultation to discuss a plan that best suits your needs, call (408) 767-2572.