Even heroes get knocked down a time or two when fighting their monsters. There may be a couple of bumps in the road, but what good plot doesn’t have some conflict?
With our passions in mind, a little bit of perseverance, and a good plan, we all get to be the hero of our own story.
Want to talk through what’s important in your story? Call or email to chat.
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While paying taxes is generally a good sign that you are making money, it seems most people want to avoid paying more tax than they need to. It’s a common enough question we field, and one worth considering.
How do we handle the tax impacts of our choices?
For smaller investors with tax-deferred vehicles like IRAs or 401(k) plans, tax considerations are simpler. Only deposits and withdrawals have any tax implications (and for Roth IRAs, rarely even then.)
Things get more complicated for investors with substantial balances outside of retirement accounts: most trading activity has tax impacts. You pay taxes on interest and dividend payments; you also become subject to capital gains tax when selling investments.
The principle of capital gains is straightforward enough. For instance, if you buy stock for $100 and later sell it for $100, you made no money and owe no tax. If you were to sell it for $110, you would have to pay some percentage of the $10 profit in tax (but not the rest of the $100: that was money you had in the first place.) And if you sold it at $90, you would have a loss of $10 that you could use to offset taxable gains elsewhere.
The important thing here is that the IRS generally only cares about the value of investments when they are bought or sold. If your $100 stock position balloons up to $1,000 one year and then collapses back down to $100 the next, the IRS has no interest in the round trip. They only see the difference from your original purchase, regardless of how high or low the price got in the meantime.
It is easy to despair when an investment is underperforming, but according to the IRS, those losses do not exist until you decide to sell. And if a high-flying investment should pull back from its highs, the IRS would give you a very funny look if you tried to claim it as a loss.
So if the IRS does not care about your gains or losses “on paper,” why should you? A drop is not a loss, and value at inception is a great anchor to come back to when you need a jolt of perspective.
And if after all this you find yourself with more resources than you would need in your lifetime, there are estate planning opportunities to consider. If you are sitting on long-term investment gains that you do not think you will be spending, there is little reason for you to sell those holdings and pay taxes on your gains yourself.
If those assets are passed down to your heirs, however, they would generally only need to worry about gains made after they inherited them, so whatever gains you accumulated during your lifetime can pass to them tax-free.
Lots to think about! It’s an important topic for many investors. Clients, when you need to talk about your tax considerations, please reach out.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Many things are made by combining some of this, some of that. In our work with you, for example, we combine some information about your life now with a vision to get us ready for the future. Here as another new year begins, our thoughts have turned to plans and planning—and the nuances therein.
A typical New Year’s resolution is a sweeping, major goal: write a book, finish a 5k race, lose this many pounds. They tend to skip a few steps. It’s about the accomplishment, not the accomplishing.
But it could be more effective to plan a tiny step, something to execute now.
Write a page.
Walk around the block.
Eat a nutritious meal.
And if we focus on accomplishing a tiny step, then another, then another, those steps may compound into major accomplishments.
You might recognize the idea at the heart of this formula: habits are the practical foundation in shaping the person we want to become. Writing one page, then another, then another. If it becomes a daily habit, you may end up authoring a book.
Likewise, it’s easier to save something every payday than it is to worry for years about the fortune you will require for retirement. We can invest by automatic monthly deposits, for example, instead of having to think about it every time.
When we can make our habits automatic, they become a lot easier to maintain. (We don’t stop and question whether and how and when to brush our teeth each day, right?)
The planning moves you closer to the plan; the doing gets things done. Wisdom? Nonsense? You decide.
When you are ready to work on your plans and planning, we’ll be happy to talk with you about the steps that may help you get there. Email us or call.
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While a lot of retirement planning information seems to be aimed at couples, statistics show that large fractions of those in the 65+ demographic are single. Pew Research reports that 21% of men and 49% of women in that category are single (i.e., not married nor living with a partner).
Some are single by choice. Others were not planning to be single in retirement but are, due to death or divorce. When decades-old assumptions about our future become obsolete, it can be disorienting. My work has given me the opportunity to learn from many of you in that position.
Adjusting our long-held plans can be a mixed bag. More than one person has expressed to me the joy of answering to no one but themselves, having the freedom to make decisions without debate. A year into widowhood, another person sold a home of thirty years and moved, expressing the sense that the new place was truly theirs. It was the only dwelling they’d ever chosen solely for their own reasons.
My wife and I were nearly a decade into a snowbird lifestyle when she passed. I thought I would always live in Florida at least part-time, as we had been. After being adrift by myself for more than a year, the clouds parted and I saw an answer I never anticipated: I came back to Nebraska as my full-time home.
And then again, others remain in the homes that had served them in life as part of a couple, because the same dwellings continue to serve them well.
Adjustments are often needed in many parts of our lives. Recreation and hobbies we enjoyed as couples may not work for us as singles. Our decisions about work may change. How we eat, exercise, and travel may shift as well.
The pain of sudden surprises like death and divorce remind us that life is always a mix: joy and pain. On the worst days, it pays to remember the duality—there are two parts to that notion, and joy and pain aren’t whole concepts without each other.
When these periods of transition arrive, it seems pretty universally helpful to have someone to bounce ideas off of, to review plans and planning with, and to talk decisions over with. From a practical standpoint, the loss of a partner often means losing the person with whom we used to talk things over. It’s a sensation many people have told me about.
All this is to say, clients, you can talk to me. I’m here to listen when you need to kick an idea around, or rethink something that needs to change because circumstances have changed. Been there, done that – we are all on different journeys, but I’ve been on some of those same roads. Email me or call whenever you might need to talk.
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Who are we to get in the way of your peace and calm? Your choices are yours. Don’t let anybody “should” all over you!
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Your money can work as long as you do—and beyond! But only if we put it to work.
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We are in the business of talking, and nearly all of that talking is with you: we’re in the pursuit of connecting your money to your life. Often, we talk about saving for and spending in retirement. You’ve heard us talk about the strategies available with Roth IRAs, in particular, a few times before.
We still believe there are advantages available here for many investors (never being taxed on gains, of any size? yes, please). But we want to add to the mix another idea. We’re recognizing a trend that merits consideration.
Life for some can seem quite linear: each milestone follows in turn. You’re born, you go to school, you work, retire, and that’s that. A straightforward path, right? Now, we’re seeing more journeys that look like they swoop around, like life is written in cursive.
Some of these deviations have been becoming more common, like a “gap year” to gain more experience out in the world after high school but before college. This is a swoop we can choose and plan for.
Other deviations are more like being thrown for a loop. On short notice, some of us find ourselves stepping away from work to care for a parent—or other family member—due to a growing health concern. Others may discover what we want later in life and find ourselves taking on seasonal work, with long stretches for travel or other passions.
The traditional retirement savings vehicles were engineered for more traditional retirements. They are likely to assess a 10% penalty for withdrawals before you turn 59½-years-old. While you can take contributions out of a Roth IRA penalty-free, doing so also takes away the chance to grow more tax-free income for the future (the opportunity for growth, not a guarantee of such).
If there’s a chance that Future You would like to retire in stages or in a unique order, this swoopy life may be something to start talking about now. We have friends who are preparing to travel the world while they still can; we have friends planning to be available to a loved one when they need it.
What’s on the horizon for you?
It could be that a balanced taxable account may be a useful complement to traditional retirement holdings. You would pay tax on capital gains, but if you won’t be earning income—or will earn considerably less for a spell—your tax rate may be lower anyway.
Want to talk through what this could mean for you and yours? Let’s talk, anytime.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
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Sometimes life’s big milestones arrive in a neat, straight line. And sometimes that’s just not what happens—or what we want to happen. How do we plan for a swoopy life?
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It’s a premise we’ve heard in songs and any number of written works. “If I had a million dollars…” It’s a great prompt—sometimes serious, sometimes humorous. I’ve decided to take a crack at my own entry into the million-dollar discussion!
I had the privilege recently of meeting a young person who shared their goal of retiring at age 30. I was struck by the ambition, shared by many in the FIRE movement: its mantra is “Financial Independence, Retire Early.” So here I am thinking about a million dollars. What I have to say is all about the numbers. Money and numbers are how we fund the life in which we act out our values, plans, and dreams.
Wondering what it takes to retire early? It’s not a universal formula, but we can take the idea of accumulating a million dollars of invested capital as a decent proxy. In this scenario, one has to be able to imagine someday living on, say, a $50,000 a year. But it also requires a willingness to endure the ups and downs of ownership. They are just part of any long ride in the markets. (And keep in mind it would take a far bigger number to retire on today’s low interest rates on stable forms of money!)
Two factors really affect the path to retirement. One is how we spend and earn along the way; the other is inflation.
First, because financial independence is all about our resources exceeding our needs—income exceeding outflow—reducing your needs is one way to get there sooner. The other side of the coin is finding ways to maximize your human capital in these working years, getting paid more for your labor. So the first best investment might be in yourself to improve your earning power. Fewer expenses, more income—more money to invest for retirement.
Second, inflation will affect how the path to retirement unfolds. Inflation risk is the extent to which our money loses purchasing power over time, so we have to take that into account as we plan for our future spending in retirement.
So let’s get back to the numbers. How much money would we need to invest each year in order to have $50,000 (in today’s dollars) as annual income in the future?
Let’s assume 3% inflation and 9% investment returns—neither of which is guaranteed—and 5% annual withdrawals in retirement. Starting from zero, we could be…
These numbers are just one way to slice it. If you could live in retirement on $25,000 of today’s dollars a year, for example, take those amounts above and cut them in half. If you would want $100,000 a year, then double the figures.
We don’t know the future, and these calculations are not the future. But it’s a place to start toward a plan.
Clients, if you want to sort out your situation—or help a younger person get started—email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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My birthday is approaching, and I’m ruminating about the meaning of another year in the life—but you already know how much I like to take a step back, get the big picture, and imagine the long view.
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