Financial Security and the Three Bears
Estate Planning, Investments, Retirement

Financial Security and the Three Bears

Hard work can make you financially successful, but it won’t necessarily keep you there. Threats to your wealth lurk everywhere. They can strike at any moment and destroy the security you spent years building.

In working with hundreds of families over the years, I’ve noticed three main threats to financial security. I call them the Three Personal Bears, and they’re just waiting to tear your savings apart.

A little planning will keep the bears at a safe distance, but first you have to know how dangerous they can be.

Personal Bear #1: Bear Markets

Any financial advisor will tell you stocks have been a great long-term investment. That’s true as far as it goes, but there’s a devil in the details.

Experts who advocate long-term “buy & hold” stock market strategies make a very big assumption: that investors will patiently sit through the occasional bear market, watching their account values drop by 20%, 30%, or even 50% without running for cover.

I can tell you from experience that very few investors have that kind of patience. This is not a character flaw; it’s human nature. Moreover, avoiding losses actually makes sense. This is because making up a loss is harder than avoiding it in the first place.

If you lose 20% of your money one year and then gain 20% on it the following year, are you back where you started? No – you’re still in the red. You need a 25% gain to recover from a 20% loss.

Recovery is exponentially more difficult as losses deepen. This table has the numbers for you.

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It’s far better to avoid these kind of losses in the first place, but that’s not what most people do. Undisciplined investors tend to buy into the market after it goes up, and then give up and sell after it falls – a recipe for disaster.

All our smart devices make being a patient investor even harder. Our phones and tablets give us such quick access to news that many people feel they have to react and “do something,” even when the best move is to do nothing.

Severe losses can be catastrophic if you are already retired or near retirement age. It’s true that your investments might come back in time, but your age clock won’t stop ticking. You may not have time to recover.

The best strategy varies for everyone, based on your goals, situation and personality. Many investors tell me it helped just to talk to someone and think through the issues. This is what we always do at Republic Wealth. We help clients develop an investment strategy that matches their unique circumstances.

Personal Bear #2: Taxes

Taxes may be necessary, but no one should have to pay more than their fair share. Many people do pay more than they have to, though, simply because they don’t know any better.

This can be a serious problem. If you are in the top tax bracket and you realize a 10% short-term capital gain, it might be only 6% or less after you pay federal and state income tax. The drag from high tax rates and fees makes compound growth significantly harder to attain.

I can’t tell you how many people overlook very simple steps they can take to minimize their tax burden. They pay thousands of dollars a year more than the law requires. The government gladly takes it, too, and rarely gives it back.

It doesn’t have to be this way. Here are three ways to keep the tax bear out of your money.

First, the best way to control your tax liability is to work with an expert Certified Public Accountant. You want someone who does more than fill out forms for you. Your CPA should work with you long before tax filing time, helping you structure your affairs in the most tax-efficient way.

Having a good accountant is especially important if you are self-employed or own a business. Structuring your business in a tax-efficient way can reduce your tax liability in many ways. You should also get an estate-planning attorney involved if your assets are significant.

Second, grab every opportunity to stash your savings in tax-advantaged investment programs. A Traditional or Roth IRA, 401K, 403B or other retirement programs let you defer taxes until you reach retirement age and/or deduct your contributions from current income. If you’ve invested the maximum allowed in those accounts, consider contributing to a variable annuity for additional savings.

Don’t forget that taxpayers over age 50 can make additional “catch-up” IRA and 401K contributions. Non-working spouses can open IRAs as well, potentially taking advantage of a “Back Door” Roth IRA contribution.

Third, work with your advisor to use tax-efficient strategies with your remaining investments. Simple moves like “harvesting” capital losses in the same year as you realize gains can reduce your tax liabilities significantly. You can also give yourself an advantage by using your tax-advantaged accounts for investments that generate short-term capital gains and current income, while holding long-term investments outside them.

Personal Bear #3: Inflation

Inflation is a silent thief. Year after year, it reduces your money’s purchasing power. Even if you manage to keep your dollars safe from bear markets and taxes, inflation can sap their value so they are worth less in the future. You might have more dollars, but each dollar will buy less than it used to.

Inflation’s impact on you depends on the way you spend your money. Prices rise and fall at different rates. Inflation is especially hard on retirees because they spend a bigger part of their income on health care and housing.

A recent government study found an alternative “elderly” inflation rate ran 6.5% over wage-earning citizen inflation after 29 years.

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The Federal Reserve Board is supposed to keep inflation under control, but even they think inflation at 2% a year is acceptable. They actually think the inflation rate is too low right now.

Suppose you do everything right and manage to grow your portfolio at 8% a year after taxes, and that the Fed gets its way and inflation runs at 2% annually. Your “real” return after inflation will be just 6%. Inflation stole 25% of your investment growth. Over 10-20 years, this can add up to a huge lost opportunity.

Read more about inflation from Mauldin Economics.

How do you stop inflation? You can’t stop it but you can try to keep pace with it. Many different strategies can help. I think the best “inflation hedge” is a well-managed stock portfolio. Because stocks represent ownership in businesses that must themselves outpace inflation, their value tends to grow in line with inflation and the broader economy.

Bear markets, taxes and inflation aren’t the only bears that can hurt you, but I think they are the three biggest threats to long-term financial success. Every family’s financial plan needs to consider these hazards and have ways to counteract them. If you don’t know if you are ready for them, Republic Wealth can help. Call on us anytime.

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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