Tax season is in full swing, and it can bring some uneasy thoughts. “How much will I get back?” “How much will I owe?” “Am I forgetting anything?” “What can I expect next year?”
In a recent team meeting, one of our firm’s partners shared a question from a client that’s often not heard, “Why is my tax bill so low?!”
This client had been taking significant IRA distributions since the beginning of retirement as they had settled into a routine of travel and other retirement leisure. Of course, IRA distributions are generally going to be taxed as income, and the client became accustomed to paying a steady tax bill each year. In recent years, their travel slowed and their expenses correspondingly decreased, but their regular withdrawals had not.
During a meeting with us last year reviewing their financial plan, this client shared their updated spending with us. As our team reviewed the numbers, it was clear that they were taking far more than they needed even after accounting for required minimum distributions (RMDs) from their IRAs.
With less travel spending and a bloated checking account balance, our team updated the client’s plan and made the simple recommendation of reducing distributions to align with their current expenses. Specifically, reducing the excess withdrawals (above RMDs) from the IRAs lowered the client’s taxable income.
As the client filed their tax return, they were pleasantly surprised to find their tax bill is far lower: $20,000 lower!
This seeming simple tweak just illustrates the power of having a system, structure, discipline, and support in managing your wealth, and this example is just the tip of the iceberg. Life happens, and circumstances change. When is the last time you reviewed your situation to ensure your financial plan is still serving your needs?
While the S&P 500 remained near its all-time high, the recent massive selloff in the technology sector went mostly unnoticed. But for investors who follow the so-called “FANG” stocks (Facebook, Amazon, Netflix, Google) the hit was painful: About $60 billion in value was wiped out in just one afternoon, representing the largest selloff in nearly 2 years.
The wipeout was a function of just how big these companies have become and the position they are in with new tax reform looming. Tech companies are expected to receive little benefit given its already-low average tax rate of 18.5% (below the 20% proposed rate).
This has caused investors to rotate out of the tech stocks and into the financial services sector, which stands to benefit more from a corporate tax rate that would drop from the current 35% to 20%.
Interestingly, the S&P 500 was relatively unaffected while this rotation into financials and out of tech ensued. The index’s volatility actually remained low, as did correlations among the S&P 500’s member stocks.
In other words, the diversity offered by the S&P 500 Index allowed for the index too remain relatively unscathed by the trading within the tech and financial sectors, a key reminder to investors that having proper exposure across the markets continues to be important with the S&P 500 near its all-time high.
Hiring a financial advisor can be a smart and profitable decision: As we detailed in a recent blog article, advisors using industry best practices can help their clients earn a significant investment premium.
There’s a catch, though. Not all financial advisors do the right thing, consistently, for their clients. Surprisingly, the great majority of financial advisors are under no legal obligation to put their clients’ financial interests ahead of their own.
As we have watched the 2016 Olympics in Rio, it’s truly impressive to see the athletes from all over the world compete at such a high level and demonstrate their true dedication to their chosen sport. The athletes and their families have spent years devoted to hard work, incredible amounts of focused energy to training, exhibit world class discipline and dedication in order to be the very best in the world. Their ascension to the Olympics of course has not been linear, as each of the athlete’s had to overcome many obstacles and adversity in their paths to reach the pinnacle of their respective sport. The Olympian athletes’ training efforts, focus, and discipline are primarily behind the scenes with many hours working with their coach and trainers, with never a promise to compete or let alone win an Olympic medal. Their hard work and tireless effort’s provides them the best chance to execute their lifetime goals.
When it comes to financial planning, I have found that a systematic approach is needed to make important decisions, focus on what matters most, and evaluate options. In previous posts I introduced the guiding principles of wealth management:
- Make your balance sheet, cash flow, and portfolio your friend
- Compare your finances to standards of excellence
- Stress-test your financial plan
- Know what is holding you back and spurring you forward
- Be specific and proactive to make permanent changes
In my previous four posts I introduced my guiding principles of wealth management, along with the first four principles (links to one, two, three and four). Today I will discuss the fifth and last guiding principle:
Be specific and proactive by identifying and implementing the actions that will result in the best permanent changes
Over the years, I have had the privilege of observing how clients meet challenges and tackle opportunities. Some have a knack for succeeding in any task they take on, while others seem to struggle more than they need to. Eventually, I saw a key distinction between these two groups: Successful people are usually very specific and proactive, while those who struggle tend to be vague and reactive. They set goals, but they do not follow through with a plan of specific actions aimed at meeting those goals. Consequently, instead of controlling events, they wind up responding to events. Getting stuck in reactive mode is another example of the 85% Trap.
By contrast, when successful people see a need or set a goal for themselves, they develop a specific plan of action. In keeping with the concept of the Essential 15%, they strive to find a permanent solution to every challenge, as opposed to a solution that requires ongoing effort.
Principles for Devising a Robust System
Henry Ford’s solution to paying workers for time spent “walking about” was a new system, the assembly line, an idea he adapted from the overhead trolleys used in the meat processing industry. “The first step forward in assembly came when we began taking the work to the men instead of the men to the work,” Ford later wrote. That slight but critical shift in thinking led to a huge leap in productivity. Average production times for a car fell from 21 days to 9 hours. The price of a Ford-made automobile fell from $950 in 1909 to $355 in 1921.†
Like any successful system, Ford’s assembly line was designed around guiding principles.
- Each worker would have one task and one task alone.
- The line itself had to be “man high” so that workers would not waste time and get fatigued by constant stooping.
- The speed of the line was calibrated to ensure that a worker was neither rushed nor left biding his time. “He must have every second necessary,” Ford wrote, “but not a singe unnecessary second.”
Take a deep breath… YOU have the golden ticket! Your thoughts immediately jump towards all your wildest dreams, and reality starts to kick in that money is no longer a hurdle to life experiences or the worldly goods you desire. If you can dream it up, you can do it! With such a substantial jackpot, it’s hard to fathom that someone could possibly blow through this type of fortune. Without a clear and concise plan, however… anything is possible!
So how do you protect yourself from becoming associated with the unwanted statistic that 70% of lottery winners eventually end up broke?
The explosion of technology in the last 20 years has brought all sorts of firepower to our desktops such that many individuals feel empowered and encouraged do it themselves, become the next Warren Buffett.
Then there’s the media coverage that glorifies traders for making “a great call” on Company XYZ’s latest earnings release or interviewing Portfolio Manager John Doe and his top performing mutual fund the last x years.
Do you own your own business? Will there be a time when you want to sell your business? What is the best time to sell your company? Do you have the right team of advisors to develop and implement a plan for selling your business? What value do you need to get for your business in order to reach your financial goals and achieve your desired standard of living? Do you have a comprehensive financial plan that gives you direction and clarity pre and post-sale?
For most entrepreneurs the sale of their business, their life’s work, the reason for jumping out of bed in the morning, is a critical moment. The Denver Business Journal has identified professionals that are experts and deal specifically with liquidity events for business owners to be panelist for the event. The panelists will provide valuable insight to get you ready when the time is right. The panel includes Steve Kopitz, CEO of skis.com and business owner who recently sold his business; Joanne Baginski, accounting Partner at EKS&H; Lisa D’Ambrosia, Director and attorney at Minor & Brown PC; Bob Forbes, President of Forbes MA Group; and Founder and CEO of Janiczek® Wealth Management, Joseph Janiczek.