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December 5, 2021 9:00 am
END OF YEAR PLANNING – RMDs are usually a big end of year to-do. This year they are not required, but perhaps a conversation about tax planning should be happening instead. Listen as Peter Richon discusses this topic and more on this week’s episode.
Plan for welcome to another additional planning matters radio show. We try to shed some light on some of those hard financial topics hopefully have a good time along the way with me today. My guest is Peter Rochon.
He is a author of the understanding your investment options. A great book and he's a fiduciary financial investment and retirement planner serving the great state of North Carolina.
If you're interested in talking to Peter directly, you can always call them at 919, 300-5886. That's 919, 358, 86, or what was website www.rochonofplanning.com Peter how are you today.
Always a pleasure doing well thank you Scott and trying to un-complicate the financial world.
That's it. Sometimes a little murky, so will try to add some clarity and today talking about some opportunities, identifying opportunities for the end of the year and then moving through the future in your planning. Awesome. So just discuss both of those things over to focus on some simple steps you can take to stay on that positive financial path now growth opportunities. Peter, you mentioned about even in crisis, there's opportunity a long-term strategy includes identifying proactive moves for both positive times which are great and a strategic approach for the downtimes. There are several moves. The proactive planner should keep in the back of their minds. For if we are producing a downturn, even as the markets do continue to move in a positive direction. As I write you, absolutely, and we have seen the markets moving in a positive direction. So were were not in crisis mode right now, thankfully, that doesn't mean that we won't see downturns in the future, and in fact long-term investors realize that that is part of the economic cycle and the long-term investment experience. So when we invest a dollar today or maybe 20 years ago. We know that that dollar is going to see ups down sideways times in the market.
We gotta have a plan for all of those now just because the market changes direction does not necessarily mean that you need to drastically alter your plan, but there may be some opportunities in up markets. The opportunities may change and be different in down markets and you need to have a long-term approach, regardless of what those conditions are right. So were trying to be proactive, not reactive to the market is what I'm hearing absolutely but but also we should not try to time the market, with the majority of of our planning progress right because we know were going to see those different conditions.
It should not be something where were jumping into day jumping out tomorrow. Jumping back in when we see the market going up jumping back out if we feel like the market is going down with the majority of our savings now because of technology and the ease of access to making trades.
There is some amount of daytrading going on people or playing options.
I know people who are invested in the crypto currency market, which is on a moment by moment basis, maybe even faster than the stock market, but that should not be the place for the majority of what you are counting on to make long-term financial progress. So if you want to allocate a very small portion of dollars to your mad money account to do some daytrading. I don't necessarily see anything wrong with that but that should not be the place where you are making your mark and your fundamental financial progress that should be more of a time-tested long-term investment approach which by the way benefits us even in down markets if we are dollar cost averaging.
If we are putting money into those retirement accounts on an ongoing basis. Even those down markets are going to long-term be an advantage. Now that being said Scott.
Nobody likes to see the market go down in their carousels this fall but if I am making contributions during that time I'm buying those shares on sale. Those are going to be the ones that actually give me the most profit. Long-term is the market rebounds and recovers. So the average person who's been in the market in a traditional sense, has seen good gains over the past several years made the last 10 years or so.
How can that person take advantage of those games that they may have made in the past years. Well, we need to rebalance on a regular basis, and so there are few fundamentals. I think we covered them. Maybe in a very recent show last week of the week before. Number one was ongoing contributions. The act of saving and investing on an ongoing basis dollar cost averaging, that is one of the key fundamentals of long-term financial success. Now we have seen growth in the equities market so your stocks in your mutual funds in your ETF's. Your equity exposure that has benefited may be more than the more conservative side of your portfolio, your fixed income, your bonds, your bond funds, which means that there is profit there on the table that you have made well rebalancing is financial, fundamental, number two on a regular basis, probably once every three months. A quarterly basis.
You should go in and rebalance your portfolio back to your target allocation. The target allocation is what you or you wanted an advisor have decided is the appropriate amount of equity exposure versus the money that you don't really want to see fluctuate in the fixed side of things. So if that for simplicity purposes is 50-50, and over the last 10 years we have seen the stock market do very very well. Wow. We appreciate the growth in the gains. It means that you are overexposed to the risk that you decided was appropriate 10 years ago. Not only that, you know the equity side. It has grown so Matt now instead of 50-50, maybe your 7525. Not only that, but 10 more years have gone by, and so the 50-50 mix that you decided was appropriate 10 years ago might not even be appropriate today. So you need to rebalance quarterly to get it back to that appropriate risk level, and then tactically about once a year, you should be reviewing that allocation in deciding whether or not that is still appropriate and it probably should change at least once every five years to help you keep more of what you have saved and earned and have a larger percentage on the more conservative side of your investment ledger right.
It's interesting you talk about the rebalancing of the dollar cost averaging no one saying that it wouldn't be amazing if someone were able to predict the market properly and jump in and out at the right time to be in the absolutely amazing fact is, no one can do that which is why you need to know, spread your assets around her in the right way. So here's the thing. Any investment professional that wants to keep their job is going to say that no one can accurately time the market and predict the future of the market accurately. 100% of the time. Now there are some indications that we can pay attention to, but were no strange world where even some of those strong indicators that have been predictors in the past aren't behaving the same way that they have in the past.
Past performance never guarantees future results in the things that have happened in the past. Don't necessarily lead to the same results in the future but more importantly, even if I was the best market timer in the world.
There are going to be occurrences certain events where even if I am somehow able to pay attention to those predictors and accurately move the money. I wouldn't be able to do anything and for an example 911. No one saw that coming.
No one knew that that was going to occur and after it occurred. The markets were shut down for about two weeks.
So with that in mind. Hey, it bounced back. Typically from events that occur that have major implications very swift implications. The recovery is also typically swift and quick. The market came back from 9/11. Now we were in the midst of a greater downturn with the.com bubble at that time, but the best market timer in the world would not have been able to react when 9/11 occurred on the other hand, something like the coronavirus if somebody is paying attention. They may have been able to be a little proactive. They are right. We started to see the coronavirus beginning to spread to American soil. We may have taken our investment allocation back a peg or two.
We were moderately aggressive beforehand. Maybe we move back to moderate. Maybe we moved back to moderately conservative.
The problem with trying to time the market is you have to be right twice. So not only do you have to get out at the right time, but you have to decide when the right time is to get back in and a lot of investors were so shellshocked by 2008 and the great recession that they had cash sitting in their investment account for years after the fact, that really didn't participate in that recovery they didn't name it correctly the second time and so it's it's really it's fundamentally very difficult, if not close to impossible to be accurate hundred percent of the time so it should not be a matter of timing luck in timing that determines your fundamental core of your financial plan.
If you want to play with the market and daytrading time things with a very small portion then you need to be educated about what you're doing, but your progress toward retirement should not be determined by right and that's not to put into not even taking in the context, the amount of time and that it would take to monitor things if one were trying to day trade and the amount of education to your point, you would need to be able to do it, even somewhat effectively week we can get alerts on our cell phones these days. But guess what those alerts still happen after the fact they are allergic to something that has already happened. So yeah we we really need to look at the progress that we have made though and and assess whether or not it is time to pull some of those gains off the table and be a little bit more conservative with them, especially if we are within that window of retirement, say 5 to 10 years before retirement. 5 to 10 years into retirement that may be the window that requires the closest and most careful monitoring consideration and rebalancing out of our entire financial lifespan when were young. When we got the paycheck. We got lots of working years ahead of us we could be more aggressive when were well into retirement. We probably don't want to risk 20, 30, 40% of our life savings disappearing without us having spent it and we are overdue for a bear market for the last hundred years since the Great Depression. We had 16 different bear markets open about one every six years we have now been about 13 years since we have seen our last bear market a bear market is quantified. It is defined as a 20% or more loss in the stock market indexes and most people don't want to see 20% of their money disappear.
That's why we need to really review and assess how much of our total assets and net worth is exposed to the market. On average, those bear markets are more than 20% usually closer to 40% and it typically takes about a year and 1/2 to go from the top to the bottom and then another five years to go from the bottom back up to the top and in recovery. So we got a look at. Do we have 6 1/2 years to let our money recover if we are contributing they they may be an advantage of those downturns but I we are no longer contributing to accounts which probably should be on the more conservative side of an investment allocation pretty smart stuff if you want to talk directly to Peter for Shanda. You can call him at 919, 300-5886 so Peter is seems like either were in a financial crisis or were waiting for the next financial crisis that's kind of the cross we have to bear here so what are the opportunities to protect our dollars from this possibility of loss, especially if someone kind of gets close to that retirement horizon will here's the thing most people swing the dollars all the way up over to the other side of the spectrum they know from taking risk being in mutual funds or stocks investments in their retirement or or brokerage accounts and they say I don't want to take this risk anymore and they go all the way over to the other end and stick the money in a money market account in a checking savings account or a mattress right yeah essentially the same thing with the interest rates that we have today. I mean you you may be protecting your money more.
If you can it up and bury it in a hole in the backyard right .01% interest is doing nobody any favors. So, wow, the money is safe. Yes, the purchasing power is not and so when we look at kind of the middle ground where can we get protection but still protect our purchasing power. There are some alternatives there. There are some opportunities for protection where you don't have to suffer market losses, but you can reasonably have expectations for 2345% rates of return based on where you put it. The thing is where you gain one quality with your money. You're always giving up on something else mean I money can do for things worse. They can grow it can be safe. It can be liquid or it can provide an income. So if we are changing from growth to safety. That's fine, but we still want liquidity or we want income from it or we still want a reasonable growth rate for going to have to give one of those up so the most common examples are if you move from a savings account to a CD right savings account.
You can access within 20 minutes if you ready to get that money.
A CD generally has a period of time before it matures.
Whether be six months or two years or or five years, and the longer you go out, the higher the interest rate. The bank is going to offer.
There are some other alternatives to CDs offered through the insurance world fixed annuities where at the end of a period of time. You get all of your money back plus the interest rates are generally generally a little higher. However, the penalty for accessing the money early is even stiffer so you can get a little higher growth rate, but more limited liquidity and then there are there other options I mean there fixed notes there are short-term bonds, real estate, you know that's the kind of thing where it's generally not liquid within 24 hours but you can choose whether you want to take an income or let the income billed for growth. There are options in between there in between the market risk taking on the full risk of of the stock market or sitting your money in a bank that can offer a reasonable rate of return. You just have to understand what your giftgiving up in order to get that safety and that reasonable rate of return no. There's all these options that you laid out there. Most investors even understand how their position to how much their position to lose if we do see a downturn or just a traditional bear market environment.
It is not stated in bold print on the top of your 401(k) statement or your broker statement right if we have another 2008, you will lose 40% of your life savings to know it it it doesn't, and therefore I would say that most investors don't understand that.
That's why you need to have regular reviews and specifically a risk analysis performed that can be quantified. I got some great tools and software that I have access to. We can plug in the positions that you own and we can quantify the amount of risk.
How do we do that well. A mutual fund by definition must stay invested per the perspectives that it lays out how the mutual fund is invested in lays out the goals and the investment exposure of the mutual fund. Well, if it by law has to stay invested.
That way we can just look at previous downturns.
Previous examples of where the market has been tested and see how that performed during those times and so we take some of these mutual funds that are in people's 401(k)s or brokerage or retirement accounts.
We say will let's look back at the past history. What is the peak to trough ratio what, what, where was this previously say in 2007. Where did it fall to in 2008.
What's the percent of value that it lost in that previous bear market well because it must stay invested per the prospectus. If we saw's condition similar to that or another type of bear market, we would expect to see the same kind of losses so we can actually quantify that for people so they can make a better decision and and look at what how much of my life savings am I comfortable losing before I get uncomfortable bread these people that operate these mutual funds.
You mentioned that there the goal is to stick to that prospectus at their end of the bargain. How much agility these people have as market conditions change to react to them or they beholden to stick directly to what what they're what they were within the first place will mutual funds have an internal cost for management right and that management makes those decisions. They do have some leeway and discretion, and if you actually look at a particular mutual fund. What you will see as you dig beneath the surface is what's called an internal turnover ratio that's how many of the positions inside of the mutual fund actually got bought and sold within a given year, so mutual funds are going to be 5%. So, mutual funds, I've seen four or 500%, meaning the entire portfolio was turned over multiple times within a year, but 80% of the mutual fund must stay invested somewhere by law, by the prospectus so it's not like the mutual fund company manager is going to go to cash if they see a downturn coming you can call them proactively, but you're not gonna receive a call from them saying hey we took your mutual fund cash they cannot, by law, but let's say that a for instance, and I'm just gonna choose a couple companies here. Apple has been doing very well and Apple constituted a 10% exposure within a mutual fund to the technology sector but the manager felt that actually Microsoft was going to be a better position to constitute that allocation moving forward.
They are capable of selling out of the Apple shares and then buying into the micro share of Microsoft shares inside of the mutual fund that is there discretion is actually what you're paying the internal expense ratio to them to do for you is managed that investment side of it so that is where mutual funds really showed some value in diversification and and having that risk management done to to some level, but there is still risk it still is invested and really what most people have is the mutual funds that are mixed up inside of their portfolio and then another level of advisor or advice that is helping to manage which mutual funds to BN and when and why they are of value right so hopefully making this money or mitigating our losses and over the next several years really hear a lot about Texas taxation of our money. This money that we work so hard or that we maneuvered so effectively in our investments and retirements to get taxed at some point for savers and investors know it's not what you make.
It's what you keep so why should we focus as much or not. More on taxation of our money. Then on the investment rate of return as much if not more.
Your correct lower because it's it's not what you make it is what you keep and typically you get to keep more. If you are planning strategically, proactively and effectively for taxation. Then, if you are shooting for higher returns and it comes with much less risk so I can take a lot of risk to shoot for higher returns. But if I'm doing so inefficiently from a tax standpoint, I still get to keep less of my money I could be more conservative not take as much risk and do so in a manner that is tax efficient and net net I get more money out of it. So we do need to pay attention to this. Bottom line, there is never a dollar that is earned that is deposited that is invested that is grown that is spent, that is transacted that the IRS does not have some type of plan for how to tax promise you they they have a plan for each and every one of those dollars.
You have the decision for how to align with their planning. So when we save for retirement. Specifically, those are what are called qualified accounts.
They are qualified for some specific type of tax planning and provision. There are a couple options under that umbrella you can earn the money and then put it away in the investments before you pay the taxes you are therefore in a partnership with Uncle Sam with the IRS they get to determine the rules and when you can touch the money and how much is theirs and how much you get to keep or you could pay the tax upfront option number two. The Roth or there a couple other alternatives there to the Roth but the Roth is the best known Roth IRA or 401(k) you choose to pay the tax upfront and then you're done with taxes forever paid tax. Once all of the growth all of the income forever and ever.
Is yours to keep. They still had a plan for how to tax it. It was just pay me now or pay me later. The third option is nonretirement dollars. You can just have a regular investment account. I have earned the money I received the money in my paycheck and Uncle Sam probably Artie took a bite out of it installed beforehand. What I have is a net amount and then I go out and invested well that is nonqualified investment that your investment account. Your brokerage account and when you lie investment positions. The growth is then taxable again right and this is why some of the ultra rich like Warren Buffett say they pay a lower tax rate than their secretary, Ray Artie paid tax on the money that they earned. Then they invested the money. The growth on that is going to be taxed at a lower rate than the brand-new money that their secretary is earning for the very first time hopefully the secretary is smart enough to save some of their money and invested so that they can also pay lower taxes into the future, but bottom line.
Taxes are going to be a factor. They're not going to go away right now we have some of the best tax planning and savings opportunities that I think will ever see in our lifetimes radio right now is really the time to look at some proactive strategic tax planning. How do I keep as much of my money as possible so it's not just that paying your taxes upfront as opposed to later with a Roth is always the best me.
Maybe it is.
Maybe it isn't, but this environment that were in right now. In particular, is one that folks might want to take advantage of with those opportunities so what are the realities and possibilities of tax law changes into the future. Of course, likely would be the legendary investor we mentioned earlier we can't predict it perfectly, but what are some possible realities and possibilities. Well, the reality is the taxes are going to go up and I know that the language has been it's only going to be on the ultrarich. Those making more than 400,000. Those with the $10 million IRA accounts. The reality is it's going to affect and impact everyone by the way that $400,000 that is before deductions on a small business owners return so I may have had net revenue in my plumbing or construction business of $500,000 but after I pay for materials. After I pay for overhead. After I pay payroll I may have only netted $100,000.
Guess what I am falling into that umbrella of the rich people making more than $400,000 and on break lose some of my ability for tax deductions in proactive planning and fall into those higher tax rates that trickles down to the price of the products and services that everybody purchases so de facto were all paying more were all incurring back tax but aside from that tax rates are going up the 12% bracket is one of our lowest brackets and in 2026 already law on the books. The 12% bracket becomes the 15% bracket 22 becomes the 25 to 24 becomes the 28 this is already law on the books and unless this administration turns around and says oh no, actually, the last administration had this thing right which chances are slim to none.
The law that's on the books will expire in tax rates will go up in 2026. So we've got just a few short years you for essentially across-the-board on everyone taxes do go up, and I think that they could go up even further into the future. So paying a low rate on savings and retirement dollars. Now generally is a good idea. Now there are some exceptions there if you're making $200,000 today but your true expenses. You can live off of $50,000, then maybe doing a Roth savings or Roth conversions doesn't make sense because you probably will be paying lower taxes and retirement, but generally I I just see it. Most people are going to stay in about the same tax bracket in your environment and so it may make sense to look at conversions and contributions, paying taxes upfront while you're earning a paycheck rather than waiting to share your retirement nest egg with Uncle Sam at a yet to be determined, tax rate or higher tax rates in the future SmartStart fear be prepared is kind of the.
The order of the day if you want to talk directly to Peter Rochon to talk about that optimize retirement plan to.
He's come up with. You can phone him at 919-300-5886 or visit his website www.rochonplanning.com that's rich on planning.com Peter, thanks so much for shed some light on the financial situation for us. You always a pleasure a lot of information.
I hope that that made sense, but got questions if you need clarification on any of that. Or if you feel like a some of that material that we discussed some of that information. I want to make sure I'm doing the right things come in give a call. All answer questions over the phone we can we can just have a chat over the phone.
I'll try to be specific and direct and help as much as possible, but if there's some higher level planning that needs to be done, and let's sit down and do that optimize retirement plan. Looking at income investments, taxes, healthcare, legacy, and a host of other issues that fall under each of those categories well. Thanks so much for that Peter had been the #19 300-5886 and Ella, thank you for listening enjoys next time on planning matters radio is planning matters radio the content of this radio shows were fighting for vision of any investment strategy you weren't purchasing investment tax or legal advice from an independent professional advisor. Any investment and/or investment strategies mentioned involve risk by three services offered through virtual capital management is a registered investment advisor.
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