If Money Were No Object, What Would You Do?

You may already be familiar with my retirement questions, the series of inquiries I use to identify my clients’ goals for life beyond work—as well as their hopes, dreams, and fears about it. With these queries, my goal is to custom-tailor a plan that works for them, one that is as emotionally satisfying as it is financially sustainable.

My questions run the gamut from practical to shoot-for-the-moon aspirational, and together, they provide a complete picture of what clients are looking for: a plan that will help them feel productive (a big issue for retirees), satisfied, and set to weather any financial circumstances that arise when they no longer have income from a regular job.

One of my favorite aspirational questions always gets an interesting response: If money were no object, what would you do?

Some people pledge that they’d buy their kids lofts in the most posh part of Manhattan with those imaginary dollars. Others ponder the possibility of fitting into a size two bathing suit, and the plastic surgery procedures necessary to make that happen. Still others wonder dreamily about the logistics of purchasing a 300-acre property upstate, complete with a bed and breakfast and working horse farm.

What’s the point of encouraging all of this wishful thinking? It’s actually two-fold: I get insight into the client’s biggest dreams, while they get a chance to ground themselves after traveling to the far end of their financial fantasies. Often, these questions help guide us toward an achievable goal that is somewhere in the middle, whether that’s contributing a set amount toward a down payment on a home for their children, investing in a little self care, or booking some riding lessons at the local stables.

With the aspirational version of their ideal retirement in mind, we can create powerful plan for long-term fulfillment.

Three Pillars of Strategic Wealth Management

Three Pillars of Strategic Wealth Management

I’ve blogged about fear’s influence on the decisions which individual investors often make, prompting them to sell when an issue is falling or buy when a stock is already near its peak.

It’s easy to say “stay the course” or “the market is just doing what it does.” But fear is not a light switch, something easily turned off. I reassure my clients by sharing with them my approach of strategic wealth management, which rests on three pillars:

  •   Real diversity of investments
  •   A safety net of bonds and cash, and
  •   Buying on weakness and selling on strength.

Like the analogy of the three-legged stool, each of my three pillars is critical to making the plans I enact for protecting and increasing my clients’ wealth “stand up.” I write much more about each in my book, “You’re Retired! Now What?” But here’s an overview:

 

Pillar #1: Real diversity of investments

I often structure portfolios with a combination of large, mid, and small-cap equities for long-term growth; bonds for potential income; and liquid assets—such as money markets, cash, and short-term treasuries—to meet more immediate expenses and income needs. 

Experience has convinced me that these can provide the most diversity when designing portfolios to help protect, grow, and distribute the wealth my clients will count on for retirement, and for the fiscal legacies (estates) they’ll leave behind. 

Equities offer real opportunity for growth. Bonds offer higher yields, but fluctuate in value. Cash, meanwhile, only fluctuates in relative value; its greatest strength is its stability.

 

Pillar #2: A safety net of bonds and cash

The fear I mentioned at the top of this post is real. 

Fanned by talking heads at the height of market corrections, downturns, or outright crashes, such fear has led some of my best clients to pull out of investments which, over the next weeks and months, have exceeded their price prior to that down day.

That’s what fear does—if we allow it to.

Fortunately, the vast majority of my clients understand that a reserve of four to five years in non-equity investments is their safety net. It also allows the final pillar of my approach to strategic wealth management to play its role: building wealth.

 

Pillar #3: Buy on weakness, sell on strength

When you buy a stock near its historic price peak (typically for fear of missing out), you take a big chance: that it will go higher still. Similarly, when a stock you own is falling but its fundamentals are strong, selling is the opposite of what you should do. 

The prudence of buying and selling at the right price and time extends beyond individual equities.

Through my broker/dealer, I offer a discounted class of mutual funds to my clients, at pricing that was once available only to large institutions. These funds are actively managed, and I add a further layer of management by watching the wider trends, and buying and selling the funds themselves based on what I see—and what more than 30 years in this business has taught me.

Strategic wealth management recognizes when an investment is at a place to take profits, and moves them into another that’s poised for growth.

These three pillars make doing so possible.

Financial Planning

Leaving a Legacy: Tax and Estate Planning

There’s an assumption among the general public that, upon attaining a certain level of wealth (don’t ask me for numbers, because no one seems to know), they and their progeny are what is popularly referred to as “set for life.” 

Hogwash. If anything, wealthy people are more susceptible to losing substantial portions of their assets specifically because of their wealth. 

As one accumulates assets over time, the titling (ownership) of those assets is like an insect in amber—locked in, based on the letter of the law. This fact makes comprehensive tax and estate planning by qualified professionals essential for protecting one’s wealth, and for ensuring their ability to leave behind an estate, a legacy for future generations. 

Many married couples have joint accounts with rights of survivorship, set up with capital well below the federal estate tax exemption limit (known as the unified credit). Over time, however, that capital can appreciate sufficiently to exceed the limit. It’s an easy-to-overlook detail, a problem waiting to happen—especially for those trying to self-manage their tax and estate planning. 

In my book, You’re Retired. Now What? I share the story of a man who named his second wife as beneficiary on his IRA, after she promised to name his children (from his his first marriage) as her beneficiaries—the recipients of the remaining funds—upon her demise. But his children would learn the hard way that blood is thicker than water. 

After their dad passed, their stepmom changed the beneficiaries to her relatives, on what was now, by law, her IRA. The people whose futures the man had worked all his life to help secure received none of their father’s IRA funds. Oops.

I’ve seen enough in my 30-plus years in this industry to help clients avoid situations like these. Sadly, they happen all the time, and they don’t have to. In this case, a trust would have been my recommendation, and I’d have referred this man to an estate planning attorney to assure it was set up properly. 

Might it have caused friction between the couple? Indeed it may have. But if he’d explored setting up a trust and the stepmom protested, the man would have learned something important about her “investment” in the relationship. Painful as that might have been for a month or two, it may well have preserved the wealth he’d worked for, and assured that his kids received it.

Because I am no expert on tax or estate planning, I make referrals to specialists in those disciplines all the time, professionals with whom I have worked for years. When their work is done, I have them copy it to me, so both my practice and my client know exactly who owns what, and who we work for: the client himself.

The Emotional Pitfalls When Handling Money | Debra Brede

The Emotional Pitfalls When Handling Money

If you believe the discount brokerage houses—the E*Trades, allys, and Schwabs of the world—self-directed investing is the way to go. Save on fees! Invest for yourself! Blah, blah, blah. (And don’t even get me started on Jim Cramer.) Far be it from me to suggest that anyone not play with their money—provided they can afford to lose it. Few can, but many take the risk nonetheless. And lose.

Back in 1987, the late Martin Zweig appeared on the PBS show Wall $treet Week and told host Louis Rukeyser, “I haven’t been looking for a bear market per se… I’ve been really, in my own mind, looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting ‘fire’ in a crowded theater.” The following Monday, the market took what remains its largest single-day percentage nosedive of all time: over 22 percent. All because some talking head scared the heck out of people. What was an individual investor, watching TV on a Friday night, after the markets had closed, supposed to do with Zweig’s warning? There was nothing they could do, and here’s what happened: Stocks began to sell off on Sunday night, as markets reopened in Asia, then in Europe. Come Monday on Wall Street, the Dow fell at the open, and continued its plunge throughout the day, with trading volume at unprecedented levels.

Armed only with the old Wall Street adage, “buy low, sell high,” what chance does a self-directed investor have? Even those who hold firm to that advice risk a crash every bit as devastating as that which befell thousands in October 1987. The reason? Trying to time transactions, which that old adage leads countless individuals to attempt. But think about what’s actually required to succeed in that, on a regular basis. You must get your transactions right not once, but twice, on the way in and the way out. And you must do so much more often than not. Good luck—especially once emotions come into play. They inevitably do, because every market brings moments of doom and gloom, and, as Alan Greenspan once said, of “irrational exuberance.” Both play on your emotions and drive bad decisions.

Everybody knows a crash or a correction is coming. But who knows when? We also know it’s possible to time stock purchases and sales perfectly. It’s just not probable. And so, just as the defendant who opts to represent himself has a fool for an attorney, so too the wealthy person, who thinks they can manage that wealth without help, risks it—needlessly.

Retirement Plan

Are you prepared for retirement speed bumps?

Retirement is an era associated with relaxing, spending time with family, and doing what you enjoy. However, it’s not always smooth sailing. Retirees often face a variety of challenges and speed bumps. Some of the big ones including emergency events, market volatility, and longevity. Start preparing now for these challenges so your retirement can be as stress-free and enjoyable as possible.

Emergency events. Life continues to happen when you are retired, and emergencies can arise. A spouse can pass way or become very ill. A child can have a medical emergency. A natural disaster can damage your home. As unpleasant as it is to think about some of the events, it’s important to plan for these events before they happen—heaven forbid. It’s easier to have the hard conversations now.

One of the best ways you can prepare is by creating emergency funds. Saving for emergencies is hopefully a habit you’ve already developed before retirement. It’s still important now.

Ensure that you have an estate plan and your beneficiaries know about it. Have plans for unexpected deaths, illnesses, or disabilities. As the years go by, update your financial plans as needed. Being proactive makes it much easier to deal with emergencies when they arise.

Market Volatility. I’m sure most retirees—and perhaps most people in general—would love to have a crystal ball to predict how the market will change in the coming years. Of course, we want it to continue to grow. However, we know that the market is volatile. Financial challenges in the economy can cause shifts as well as events we can’t predict—like natural disasters.

Prepare now for potential downturns so you can continue living a comfortable retirement regardless of dramatic shifts in the markets. A financial planner can give you advice on how to best protect your portfolio and assets.

Longevity. This likely comes as no surprise—Americans’ life expectancy is very high. While this can be great, there are also challenges. For example, as we age, medical problems (and expenses) can increase.

Additionally, some retirees may worry they could outlive their retirement savings. Even if you have a robust nest egg, this is still something important to consider. After retirement, some people continue to spend the same as they did when they were working. When you aren’t making the same income, this can deplete your resources faster than you may expect. It’s great to spend money on trips or large purchases that you have planned for, but keep in mind how long you will need your wealth to last. Spend wisely. A financial planner will guide you to make educated decisions.

Your retirement years can be some of the best ones of your life. But beware of potential speed bumps. Prepare now and you can have the relaxing retirement you’ve been preparing for.

Tax

Five Tax Advantages of Retirement

Careful tax planning can provide retirees with significant opportunities for keeping more of their money. Here are five examples. (Consult a tax advisor to determine your best options.)

#1: Retirement Plan Contributions

People over 50 enjoy higher contribution limits for traditional and Roth IRAs, and 401(k)s. If you’re married, own an IRA, and your spouse is still working, he or she can contribute to your plan, in addition to their own.

#2: Business Expenses

Whether you consult for your old company in retirement or start a new one, remember: businesses, both full- and part-time, are great sources of tax deductions. You can reduce your business’s income by the reasonable expenses that come with running it, including business travel, equipment (like computers), and office space. If your venture loses money, you can often deduct the loss from other sources of income.

#3: Use RMDs for Tax Payments

Assuming your post-career business is profitable, you’ll have to pay tax on that income.

Instead of calculating and sending estimated tax payments to the IRS during the year—a requirement for the vast majority of the self-employed—people who are taking required minimum distributions (RMDs) from traditional IRAs can wait until December to take the distribution and ask their IRA administrator to hold back extra funds for taxes.

Tax money withheld from IRA distributions is considered “paid tax” throughout the year, even if done at year-end. This allows you to dodge the requirement (punishable with penalties if broken) to make estimated tax payments on self-employment income throughout the year—provided your RMD covers your total tax liability.

Of course, be sure you won’t need the RMD to meet living expenses during the year!

#4: A Vacation Home

If you sold recently your empty nest and moved to a vacation home, you might qualify for two windfalls within a few short years.

If you lived in the old homestead for at least two of the last five years you owned it, your profits on its sale were tax-free (up to some generous limits).

When you move into a vacation home you’ve owned for 25 years or more, and designate it your principal residence for at least two years, you can keep some of the profit on its sale as well, under IRS rules. (Consult your tax advisor to see if you qualify.)

#5: Give It Away

Many retirees use the gift tax exemption to help keep their tax hit as low as possible, especially those likely to owe estate taxes when they die. The gift tax exemption allows you to give up to $15,000 per year (at this writing) to as many individuals as you like—up to a lifetime total of $11.4 million. Married couples can give twice that amount.

Don’t let your generosity end with family and friends. By gifting items to a qualified charity—a car, boat, or plane, for example (cash donations are treated differently)—you can deduct the gross proceeds realized by the charity upon its sale of the item (provided you valued it at $500 or more when signing over the title). Note that such contributions are only deductible (under IRS rules) when you itemize. Remember, grouping contributions within a calendar year might help you reach the itemization threshold.

Couple looking at tablet at cafe

How to manage your wealth during retirement

After working hard and investing your wealth strategically for most of your life, you’ve made it—retirement. Welcome to your Golden Years. Now that you are here, ensure your retirement is comfortable, relaxing, and fulfilling by managing your wealth well. Here are my top 5 tips to ensure you are smart with your finances during these years.

  1. Consult with a financial advisor. Up until this point, you’ve likely worked with a financial advisor to build and grow your assets as you prepared for retirement. But now your financial advisor can still help you plan how you will use your wealth. We can also give you more specific advice, including how to be smart about taxes, how to continue growing your assets, and more.
  2. Consider how you will allocate your funds year to year. Even though you have reached retirement, you should keep planning how you will use your wealth year to year, even month to month. Budgets will remain useful so your funds won’t deplete sooner than you anticipated. Of course now is the time when you can take your dream vacation and spend your hard-earned money, but make sure you have a plan.
  3. Continue a dialogue with family about finances. Hopefully, you’ve already been talking with family—especially your spouse—about managing your wealth. Having these conversations before retirement will help you transition more smoothly. Unfortunately, there are many couples who disagree about lifestyle after retirement. Some want to travel, others may want to downsize the family home—it really varies couple to couple. Talk about your goals and what you want from retirement. It’s wise to be in agreement before making big or indulgent purchases. Chatting with the rest of your family, like children or other beneficiaries, is also useful. They certainly don’t need to dictate how you spend your money, but it is wise for them to know your plans.
  4. Spend on yourself. You worked hard your entire life and planned for a comfortable retirement. Enjoy it! If you plan to spend money on your family—adult children, grandchildren, your parents, etc.—make sure to budget those expenses. But prioritize spending on yourself. You deserve it.
  5. Keep planning! The plan you start out with at the beginning of your retirement can, and probably should continue to change as your circumstances change. In fact, there are often different phases in most individual’s retirements. In the beginning, you may be more active, traveling and spending more. Then you may want to settle down, spending more time at home, close to family. During this time, you likely spend less. As we continue to age, medical expenses may increase, which can cause another spike in spending. Keep assessing your budget and wealth, and adjust your plan accordingly. A financial planner can help you with these plans as well.

Retirement is a wonderful time during your life. Following these tips can lead you to manage your wealth wisely. For more information and advice, please visit debrabrede.com.