We want you to plan for success. Welcome to Planning Matters Radio.
And welcome in to another edition of Planning Matters Radio. I am Peter Rachan, founder, advisor at Rachan Planning. You can find us online at richonplanning.com.
That's what it looks like. It's rachanplanning.com, my last name, the name of the firm. And we are a full-service financial investment and retirement planning firm. If you have any questions about your money, how to put your investments to better use, how to control the amount of risk that you are taking, the fees that you are paying, the taxes that you may be liable for in the future, really comprehensive planning from beginning to save. We provide advice and guidance on that. But once the investments get going, we can help to monitor those investments. We can help to manage those accounts and make sure that they are working toward your goal of retirement. Most of our clients are really good savers. They have done a good job in building those accounts. And they are wondering how to properly structure and utilize them for a confident retirement. And that's what we are all looking for.
That day, that time where we can stop trading our time for money, stop setting the alarm and showing up to work and enjoy more of our time. Well, it takes a plan. It does take some money to be able to afford to do that. And we want to help get our clients there. So we help to monitor, we help to manage, we help to grow those investment accounts. And then when the time comes that you step away from the paycheck, we help to make sure that you've got a plan in place that you can feel confident about.
If you would like to get that plan, we call it the optimized retirement plan. You are welcome to pick up the phone. Give me a call. Give Rashan Planning a call. You can speak with my wife Amber.
You can speak with myself. You can speak with one of the members of our team. 919-300-5886.
919-300-5886. And in fact, we'd love to hear from anyone with questions about their money, about their planning, about how to make all of the pieces fit together. And a lot of people do say, hey, I've got a plan.
I've got a 401k or I've got some IRAs. And while those are fantastic tools, those do not truly constitute a plan. The plan would detail how and when those dollars will be utilized, how much of it you will actually get to keep and spend, how much you will be paying in tax on them, and make sure that it is properly and appropriately allocated to achieve those goals. That's really the blueprint for your financial confidence. And if you hired a contractor or a home builder, you would say, hey, let me check out the blueprints.
If they said, well, I've got plans. I've got this hammer right here. Well, a hammer is a fantastic tool and probably a necessary tool, but it does not constitute a plan. And that's the way it is when we've got these dollars in investment accounts. It is a fantastic tool, but it does not constitute a true plan.
And so we put that plan together. We look at your income, your investments, your taxes, your health care, your legacy, many subcategories in each one of those major topics. But we make sure that all of those things are working together, they are in alignment, they are cohesive, so that you can have a comprehensive plan that gives you that confidence to be able to walk away from your paycheck or to be able to spend throughout retirement and not worry about running out of money at the end of retirement. That's the goal, is that kind of level of financial confidence that allows you to live the lifestyle that you are accustomed to and that you dream about into and throughout retirement and make sure that you don't have to change your quality of life. That's the optimized retirement plan. Again, if you would like to get that put together, we do not charge for that service of the initial conversation, or the planning strategy session, or even to get that plan in your hands. If you believe that what is shown in that plan would provide you with measurable benefits and we have a connection to where we feel we like seeing each other, we enjoy the conversations, we can talk about moving it to the next step and forming a relationship with you, with us, and with your money and making sure that we are all working together with our eyes on the end goal of giving you that kind of level of stability and financial confidence moving into and throughout retirement. Again, if you would like that optimized retirement plan, pick up the phone, give us a call at Rishon Planning, 919-300-5886.
You can also go online to richonplanning.com, Rishonplanning.com, and you can download a copy or request a physical copy of my book, Understanding Your Investment Options. I joke with many people and say, hey, this is the cure for insomnia, but in reality, I think that this is a very important book. It kind of breaks down each one of the available options for where to put your money, the tools that are available, and says, what is the use of this tool? When and how should it be considered? When should you utilize it? Why would you utilize it? What kind of risks are you exposing yourself to? And what is the end result that you would be looking to achieve by utilizing this particular option, whether it's a stock, a bond, a mutual fund, an ETF, an IRA versus a Roth, life insurance, annuities, gold, cryptocurrencies, debt. That's a financial tool as well.
When do we use it? Well, we try not to as much as possible. In fact, by all means possible.
Let's try to avoid that. It is a natural course in the process of financial progress for many. Unfortunately, we overuse it and abuse it too many times, but oftentimes we don't have the money to plop down to buy a house in cash, and so debt is part of our financial progress. When in the order of operations should you pay off that debt?
Do you need to be completely debt-free and have no mortgage to enter into retirement? Well, it certainly is helpful, but should you cash out a large amount of savings to make that happen right before retirement? I talk that through with a lot of folks. That's one of the repeat questions that I've helped people really evaluate many times. And again, if you've got questions of your own, how to maximize your social security, you're looking at that tax-deferred balance in your 401k or IRA, wondering how can you minimize the taxes on that? All of that is part of the optimized retirement plan process. We'd love to hear from you if you've got questions, if you'd like to talk those things over.
919-300-5886. Let's say this week began with a bang or maybe a boom with the Evergrande debacle. Now, many people say, what is Evergrande? I don't know anything about that. Well, you probably heard about the market losing more than 2% on Monday. And in the natural course of things, the market has ebb and flows. The market has news of the day that flashes and all of a sudden the market reacts.
It is reactionary. And sometimes that can worry people, especially when that reaction is to lose a great deal of value in the market. And 2% is a significant amount of a lot of people's life savings.
But if you're worried about losing 2% in one day, and then you think back a year and a half ago, almost two years ago now, to when coronavirus was first spreading to American soil and the market lost more than 30%, if 2% in one day concerns you, then why would you leave your money and your assets? And it's not just money and assets. It's your life savings. It's a representation of all of your hard work. Why would you leave that in a place where 20 to 30% could be wiped away?
How many years of hard work does that represent for you? And those are the kind of questions that we talk about in that review and that strategy session is, are you comfortable with taking that level of risk? Are you in fact taking that level of risk? How are your dollars positioned? Have they lost value significantly in previous market downturns? Well, if they have, then you probably are positioned to lose value again. And in fact, because of the great market run-up that we've seen over the last decade, many, many, many people that I talk to are actually far more exposed to risk than they were comfortable with even five or 10 years ago and initially set the account up at.
In other words, if we only wanted to risk 50% of our money, which is actually a pretty large percentage of our money, if we only wanted to have that money on the table in the risk bucket, so we set that in place five or 10 years ago and then the market has done phenomenally well, we probably today have significantly more than that 50%. We need to bring that back into realignment. Now that's part of regular rebalancing. That's part of the services that we do when we manage and monitor our clients' accounts is that we rebalance strategically on a regular basis to make sure that we maintain the level of comfort and risk exposure that our clients are comfortable with.
We also do tactical rebalancing from time to time. If we see something indicating that there could be a downturn in the market, if we see a tidal wave coming, we're going to change how our clients' money is allocated to adjust for that. Now, I am no way a market timer and in fact, even the best market timer cannot avoid all downturns. If you remember 9-11, that was a major event and when that occurred, the markets were actually closed for about two weeks after that event.
There's no way that we could have seen that coming or gotten out of the way or adjusted. And if you are trying to time the market, it's inherently difficult because you have to be right twice. Even as COVID was hitting American soil, if we pulled back on our risk level and avoided that major 30% drop in the markets, when do you get back in? Because down at the bottom there, it felt like we had never seen a shutdown on that level.
The world economy was halted almost immediately. Is that the moment that you feel comfortable getting back in? Well, if you're a younger investor, and many of our clients are, maybe that is the opportunity of a lifetime to put money into the market. But if you are nearing retirement or already in retirement, looking at the scenario as it happened then, and sure, in hindsight, we can look back and say, the market rebounded fantastically and we're higher than we ever were before. But in that moment, making that decision of how to get back in and when to get back in and with how much to get back in, that's inherently difficult. And so in order to time the market correctly, you have to be right twice and you have to be able and be confident in pulling the trigger on both of those. Let's get out now.
Let's get back in now. And you also have to stick with the consequences of that decision only armed with the knowledge that you knew at that moment in time. And again, looking back, it's very easy. But these are the type of things that we try to talk through with our clients to make sure that from the onset, we have an appropriate amount of risk exposure and only an appropriate amount of risk exposure. And within five to 10 years of retirement, I don't believe that most of my clients are in a position nor do they desire to have the risk level where more than about five to 10% of their money could be lost, could disappear without them having anything to show for it. If we had another major market downturn, a 2000 through 2002 dot-com type bubble, a 2007 through 2008 great recession, the housing market bubble, a 2020 coronavirus, if you're positioned where you would lose the full amount of that downturn, 50%, 50%, 30%, it takes a lot of recovery just to get back to break even. And in fact, in the dot-com bubble in the great recession, it took about 100% to get back to break even after losing 50%.
Now, if I told you that there was a decade where we had two separate 100% returns in the market, you would expect that to be a fantastic decade, except that we also suffered two separate 50% losses. And so that entire decade was basically flat. It was a roller coaster. It was in fact just like a roller coaster.
The roller coaster starts in one place, goes way, way up, goes way, way down, maybe does some loop-de-loops along the way, but ends up back right in the very same place so that the riders can get off and new riders can get on and experience that thrill. When it happens with your money, it's not so thrilling, especially when it takes 10 years of your hard work just to get back to the same spot. Now, if you were working during that period of time and you were making contributions to your retirement accounts, it still was probably a decade where you made forward financial progress.
But for the money that you had saved in the decade prior, the previous account balance that you held in 1999 or 2000, right before that first downturn, it took about 12 to 13 years for those dollars to produce for you any profit, minus dividends, but also excluding fees. And so most investors don't expect to go through 10 to 12 years where their money that they have worked hard for, that they have managed not to spend and save and put away, where that money that they've invested with the hope of growth hasn't produced any returns. But that is the risk that we're told that we need to take.
In fact, is it? Do we really need to take that risk? You know, I question that a lot. The question that a lot of investors get is what type of investor are you? Are you conservative? Are you moderate?
Are you aggressive? Well, if it was all about returns, we would all be aggressive investors. If it was all about our expectation for growth and the more risk we took, the more growth we'd get, we would all be aggressive.
But it's not about that. It's about the losses that you are willing to take. It's about the amount of money that you are willing to say you could see disappear and not have anything to show for it and you'd be okay with. That is what truly indicates your risk tolerance. And we have come to a point where risk and return are intertwined.
They're tied together. You have to take more risk in order to get more return. Well, backtesting that theory has actually not proven to hold true. I've got some great portfolio models that are low volatility models. These are specifically designed not to have as much fluctuation, not to have as much volatility. And backtesting these models over the last 30 years, if you include good times and bad times and you just compare the low volatility to the S&P 500, they take a lot less of the movement, the ups and downs, the roller coaster ride, and they go from point A to point B in about the same amount of time and have actually outperformed the market over 30 years. And if you'd like to see those kind of low volatility models and you still are willing to take a little bit of risk with your money, but you'd like to see how taking less risk and having less volatility could still benefit you for growth in the long run, I'd be happy to show you those what I call the smart beta low volatility models. If you'd like to take no risk at all with your money, it does not mean that you have to completely give up on gains. There are a lot of great options out there that do not have the risk of the market where you can still make fantastic forward financial progress and in fact a lot of those have also averaged better returns than the market over a 10 or 20 year period. If you'd like to see them, pick up the phone, give a call, 919-300-5886.
919-300-5886. In fact, from the period 2000 through 2021, a 21 year period in the market, many investors would probably say that, hey, the market has done what it's always done. I've heard the market always averages a 10% rate of return.
Maybe there was a few bad years, so maybe it's 8%, but the true return of the S&P 500 over that 21 year period is just under 4.75%. There are safe options that you could have locked in that would guarantee the growth of your money by a significantly higher rate, especially if you talk about for the purpose of generating future retirement income. These solutions aren't a solve all because where you get one thing, you may lose out on another. I talk about that in my book Understanding Your Investment Options, that money can do four things for us. It can grow, it can be safe, it can be liquid, or it can provide an income. Money is a terrible multitasker.
For each dollar, you have to pick which one of those is most important and you can pick a secondary goal and say I would like it to also do this, but it's not going to do all four of those things simultaneously. For example, money in the bank is about safety and liquidity, so it's got two goals there, a primary and a secondary, but it's not great for generating a high cash flow or an amount of income and it's not going to grow too much. Interest rates are pretty pitiful on safe liquid money right now, so you have to decide which is important to you. Now, money in the market, that's about growth and liquidity.
If I have a stock I don't like or a mutual fund that I want to get out of, I can typically give a sell order and get out of that stock or mutual fund by the end of the day or 24 hours, one business day at the most. I can be out of it, so it's liquid and the primary reason why we would invest in a stock or a mutual fund is for growth, but trying to take an income from a fluctuating source, especially when it goes down, you are burning the candle from both ends. You're removing money from one side and the market has decreased your value on the other side. That leads to running out of money a lot sooner than you expect because those dollars aren't there to recover when the market does rebound. It doesn't have the safety, it has liquidity, it's got the potential for growth, but providing the income is inherently difficult.
So, again, deciding what's important to you. And so, in my book I go over that and with each option I say what it's good at, what it's bad at, and if you'd like a copy of that book you can download it for free, the digital version, at our website richonplanning.com. That's what it looks like, richonplanning.com. It's richonplanning.com.
Or if you go to the website and enter in your information, we can also get you a physical copy if you would prefer that. But understanding your investment options I think gives people a great foundation for making a decision on if you can realistically review and evaluate your goals, what options meet those goals. So, again, on Monday of this week we saw a more than 2% decline across the market indices. Now, it's rebounded since then, but what caused that?
So, there are a couple things that I want to talk about here. Number one is this infrastructure bill that is being pushed through. $3.5 trillion of spending, and by the way that is really a false number because what they've done is the projects that are included inside of that infrastructure bill, they funded them for about three years. The thinking is that by the time they are implemented and the American public gets used to some of the things that it provides and three years passes and they run out of funding, that we'll cry that we need those things, that we deserve those things, that they in fact are a necessity now. Well, they don't have the funding past the three years, so in actuality it's much more than $3.5 trillion.
How are they going to pay for this? Included in that bill is tax increases. What do the tax increases look like? Well, two of the big ones that have been talked about are tax rates on corporations, corporate tax changes, and tax on gains and growth on investments in the market, capital gains. So, part of the reason why we saw that sell-off on Monday was that people were trying to realize their gains and get out while gains were on the table at the lower current tax rates.
Here's the flawed logic in that. The bill also, by everything that I've heard, by everything that I've read, by those that I've talked to that really know what's going on, by design, and I don't know whether this is genius or insidious, the tax changes that they are proposing are going to be retroactive to the beginning of the year. So, even if you rush out to try to get ahead of this and sell-off those gains, you probably, if the bill passes, are still going to be subject to the new capital gains rates. Why would they do that?
Well, one, why wouldn't they? They're trying to raise as much money as possible, but two, they're doing it specifically to try to avoid, in fact, the very thing that we saw, which was a sell-off, because if the tax rates are already in place and they're retroactive to the beginning of the year, there's no incentive to rush out, sell your holdings, and realize those gains at the now higher new capital gains tax rates. However, if they did what they have done previously and basically pushed the inception of the bill and the enactment of that law to January 1st of the following year, well, now there's this big window of opportunity, and that can create a market run and a huge sell-off, because if I have a gain in my portfolio of $100,000, $200,000, $300,000, and I know that I could go and sell right now and pay lower capital gains tax rates, but if I wait until after January 1st, I'm going to pay the new higher capital gains tax rates, I'm going to rush out and sell, and so would every other investor, and not just ones with $100,000, $200,000, $300,000.
I'm talking about ones with millions, tens of millions, hundreds of millions of dollars. The big money out there would rush to sell to the current lower capital gains rates. They would try to avoid that, so the bill specifically is designed to try to avoid this, again, from everything I've read and understand by making those taxes retroactive to the beginning of the year. Now if you rush out and sell, too bad, so sad, you're already locked in and subject to the new rates. That's one reason that we saw that, because that bill is making progress, it's looking more and more like it is going to pass, and so they are trying to avoid what actually created by the news that this bill is moving forward and tax rates are going to change, so people hear that, they rush out and sell, not really realizing the full implications that even if they do that, even if they have now done that, they are still going to be subject to the new laws, the new rates. Number two, we heard about this Evergrande, which is a Chinese construction company.
At its core, I'm going to really simplify this. This is one of the largest building and construction companies, and there are a lot of comparisons here being made to the housing market bubble, the great recession here in the US, and the collapse of Lehman Brothers, because this company apparently has an awful lot of debt, and when I say an awful lot of debt, like a tremendous amount of debt. When we hear a billion dollars these days, it doesn't sound like a whole lot because we hear it so often and we hear trillions and that's an astronomical amount, but this company has 250 billion dollars in various types of debt. That is a huge amount when you compare that to America's largest company like Apple, they've got about 100 billion dollars in debt, but they also have the capital that they could pay that off. This company does not.
They're about 5% the size of Apple. So Apple, the corporation, the value, the market cap of Apple is like 20 times that of this company. This company is a construction company that from what I've heard and read has built a lot of the government construction projects in China, issued a lot of debt. There's a lot of the government money that's tied in with them. Well, not only do they have the debt, but then just like the housing bubble in 2007, 2008 here in America, there was an extra layer of risk that was added because bets were then made, derivatives, on the initial debt itself. So instead of just 250 billion in debt, when you add up all of the subsequent bets that were made on whether they'd be able to pay that debt or not, it adds up to like a trillion dollars, which certainly moves the needle. Now on one hand, we're talking about spending 3.5 trillion, and on the other hand, well, here's this one trillion dollar problem. Couldn't you solve that?
It's two completely different things. And no, a trillion dollar knock, if they were to fail, if they were to default, would have ripple effects not just in China, but globally. And there's a lot of American investment that is tied into China and all international companies at this point in time. That's what we talk about with the global economy. We depend on them, their products, their goods, their services, their investment capital. They depend on us, likewise. Everything is sort of interconnected. So as this huge major company is beginning to look like it could falter and the dominoes may fall, will that have that same kind of ripple effect that the housing bubble and the collapse of the housing bubble in the American market had not so, so, so long ago, 2007, 2008.
Well, there's a lot of information out there that says the analogy is wrong, that that comparison is not a fair comparison. However, we saw, just from the initial jitters of the possibility, a 2%, a more than 2% correction in the market in just one day. Again, it's recovered since then, but it's now the time to really look at how much risk you are taking. And should you be taking some of that risk off the table? And it's now the time to be looking at how you can manage your taxes. And again, maybe those retroactive tax laws, if they pass, that may be one element of the taxation of your total portfolio. But on your 401Ks and your IRAs, is now the time? Do we right now have an opportunity to pay less in taxes than we might into the future?
I believe that absolutely yes we do. And the larger your portfolio, the bigger mistake it is to overlook this opportunity because it could be use it or lose it. Just a recent example, I talked with a fantastic couple. They were currently retired and in the 12% tax bracket. But where their income is going to go in just a few years because of required minimum distributions, they are going to be in a much higher tax bracket. They've done a good job in building up tax deferred dollars. And we projected it out and we realized that they would be in the 28% bracket into the future.
Well guess what? There's two brackets currently available between the 12% and 28%. And so should we utilize some of that space to pay a little bit in taxes now at 12% or at 22% or at 24%? If we know that in just a few short years those dollars are going to be ending up in the 28% bracket, it looked like an opportunity to me and I believe that they agree and we'll be doing some proactive tax planning.
Those are the types of analysis. And we can quantify that in dollars. That's part of the optimized retirement plan. So if you are currently saving in tax deferred accounts, if you are an owner of a tax deferred 401k IRA with a good tax deferred balance built up, now is your window of opportunity.
This is the wake up call. Do some proactive tax planning. If you are worried about the amount of risk that you have in the portfolio and where the market could be heading, now is the wake up call. Do some proactive planning and control your risk exposure. Those are the conversations we can have with you on the optimized retirement planning, looking at your income, at your investments, at your taxes, at your healthcare, at your legacy and formulating that optimized retirement plan to address the risks to each one of those. If you would like to take advantage of that, no cost, no obligation, pick up the phone, give me a call at Rashaan Planning. You will speak with me personally.
We will talk one on one. We will talk confidentially about your situation and we will find out if there are some opportunities for you to do better or make your money behave the way that you would like it to behave. 919-300-5886, the number to call. 919-300-5886. Control your risk, control your taxes, control your fees, control your financial future.
Those are the three big keys. If you would like to address those, pick up the phone, give me a call. 919-300-5886, 919-300-5886. Go to my website, richonplanning.com, Rashaanplanning.com.
Download a copy of my book, Understanding Your Investment Options, and I really sincerely look forward to speaking with you soon and helping to provide you whatever assistance or guidance you are looking for with your money to make more informed and better decisions to improve your outlook and your confidence in your financial future. This is Peter Rashaan with Planning Matters Radio. So glad you could join me. Give me a call. 919-300-5886, 919-300-5886.
I look forward to speaking with you soon. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.
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