I learned the importance of having a plan at an early age thanks to my father, a homeless camp and sack lunches.
My father was a pastor, and he viewed helping the homeless as a calling. So, on Saturday afternoons, my family would prepare 125 sack lunches, with the contents of those lunches imprinted on my memory to this day – a bologna sandwich, a bag of potato chips and a Little Debbie.
We would rise at 6 on Sunday morning, load the sack lunches into a van and travel to a park where homeless people camped. There we handed out the treats. The sack lunches came with no strings attached, but my father took the opportunity to invite people to church, granting a hot lunch after the service to whomever accepted the offer.
That made for memorable rides from the homeless camp to church, because my father always asked the people to tell him their stories about how they ended up down on their luck. As the miles clicked by, I listened. Some people had been successful at one time but had been unprepared for a stock market crash that left their finances in ruin. Others fell on hard times after a spouse died. Whatever the story, a common theme emerged: They didn’t have a plan for withstanding life’s cruelest turns, and that was their downfall.
Those stories left an impression on me while also teaching me this lesson: Life can happen to anyone at any time.
Whether we like to admit it or not, that’s true for you and me if we don’t have a financial plan that will see us through the ups and downs. We all face plenty of risks in life, but your plan should address at least three of those risks: tax strategy, investments and longevity.
It’s common for people to owe money on credit cards, mortgages and automobile loans. But many people arrive at retirement without realizing that their largest creditor may not be one of these. Instead, it may potentially be the IRS.
That’s because so much of most people’s retirement savings is comfortably tucked away in traditional IRAs, 401(k)s or other tax-deferred accounts. Things get uncomfortable, though, when you begin withdrawing that money because that’s when the taxes come due. And, over time, the money in those accounts has grown, which means the amount owed in taxes has grown with it.
We have seen cases where individuals have been able to pay a significant amount less than what they thought they would have to by employing a tax strategy that helps soften the blow of the now larger tax burden. That is why we discuss potential tax liability with our clients; it is a significant part of overall financial health, especially in retirement.
Take this hypothetical example. If a client has grown their tax-deferred accounts to roughly $1.1 million, they may feel pretty go about this – that is until we take a real look at their potential tax liability. Leaving the money as it is, over time, they could potentially pay $500,000 or more in taxes. Obviously, that changes the picture, but what can they do about it? We discuss converting the money into a Roth account. Roth accounts grow tax-free, and you don’t pay any taxes when you make a withdrawal (as long as you are 59½ or older and have held a Roth for at least five years). You do pay taxes when you make the conversion to the Roth, but we’ve seen many times it can be significantly less than if a client had chosen not to make the conversion.
This could be a good time to make a Roth conversion because taxes are at some of their lowest levels in history. That may not last, though, because the Tax Cuts and Jobs Act of 2017, which brought those low tax rates, ends at the close of 2025.
Everyone hears about the importance of diversifying. But too often, people don’t truly diversify their assets – they just allocate them. They may invest in a variety of stocks, but variety alone doesn’t limit the risk that market volatility puts on your portfolio.
Instead, what you’re looking for is different tiers of risk. For many people seeking diversification, a portion of their portfolio should be aggressive, invested in stocks or exchange-traded funds (ETFs). That’s where you stand to enjoy the greatest gains – but also risk the biggest losses. You also may want to have another portion of your money in moderate- to low-risk investments, such as bonds or real estate. Finally, you should have money set aside where it isn’t subject to the whims of the market, such as money market accounts, CDs or fixed-index annuities.
On the surface, longevity doesn’t sound like a risk. A long life is a good thing, right? But the risk here is that you can outlive your money. Many of the clients I see are baby boomers who were taught about having a three-legged stool in retirement – Social Security, savings and a pension.
For many people, pensions are a thing of the past, leaving that metaphorical stool balanced precariously on the two remaining shaky legs. Social Security can struggle to keep up with inflation, so personal savings can take on an outsized share of the responsibility for maintaining the retirement stool’s equilibrium. With that in mind, we help guide our clients to use at least part of their personal savings to create their own pension, such as with fixed-index annuities. That creates an income stream that can see them through their retirements. We also use accounts that have some type of rider to cover long-term care or that have an income payout, such as indexed universal life insurance.
A good first step in creating your financial plan is to talk with your adviser about your goals and concerns. In addition to tax strategy, investments and income, you may also want to discuss health care and legacy.
Then your adviser should design a written plan for you that addresses those concerns and helps you meet your goals. Afterward, I recommend meeting with your adviser at least once a year, so the two of you can review the plan and decide whether it requires revisions because of changing circumstances.
Remember, life can happen to anyone at any time. A bologna sandwich, bag of chips and Little Debbie might make for a good sack lunch, but a strong financial plan is more nourishing for the long journey ahead.
Ronnie Blair contributed to this article.
Williams Financial Group, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Williams Financial Group LLC are not affiliated companies. 1271539 – 4/22 All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to guarantees or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences, including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA.
Founder, Williams Financial Group
Stacia Williams is founder and wealth adviser for Williams Financial Group. She helps clients pursue their retirement goals and dreams through well-thought-out financial strategies. Williams has an extensive background in working with individuals across socio-economic and cultural divides, which aids her firm in providing holistic and culturally relevant services to clients.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.