Do you have what it takes to make the most of your lifetime wealth? If you’re on track financially, that’s a big part of the equation. But it’s not everything. There’s also the key question: What do you want to do with your wealth?
If you’ve spent decades capitalizing on your professional skills to create stellar earnings, you may already have covered your family, community and business obligations, and be on track to retire when you please. You have already mastered the building wealth part.
But then what?
What Do You Want for YOUR Retirement?
From what we’ve seen, many high-achieving professionals aspire toward something more than endless days of golfing. Maybe you’re envisioning a second career in consulting, or mentoring the next generation. Maybe you’ve got a hobby you’d like to take to the next level. Whatever. These days, “retirement” for a successful professional often involves transitioning into different rather than fewer activities – ones that bring you renewed joy and fresh passions to pursue.
Authors Ken Dychtwald, PhD and Robert Morison explored this alternative take on retirement in their intriguing new book, WHAT RETIREES WANT. They describe how the years leading up to and into retirement are often a journey, not a destination. This perspective is especially appropriate for high-end professionals who wouldn’t mind leaving full-time employment, but would like to remain active and engaged.
How Will You Achieve What You Want?
So, what are the right steps to take now, while you’re still accumulating wealth? How do you ensure the biggest purchase of your life – your ideal retirement – works out well for you?
Said another way, even if you’ve created durable wealth for a desirable transition, what else can you do to secure your second-act lifestyle? You have always had great success in your professional life; you don’t want to screw it up now. You need to know not only how to build wealth, but how to maximize wealth for the “retirement” you envision.
Every financial decision you make sends ripples through your life, and each lifestyle choice has financial implications. That’s why we work with high-end professionals, to navigate the intersection of their life and their money.
Wealth planning, wealth enhancement, and wealth protection all factor in – well in advance of retirement, and throughout your financial journey. Strategic tax and income planning also play a key role in achieving your lifetime of interests. And yet, many plans fail to consider how critical it is to manage these factors across years, if not decades.
Let’s take a look at what this level of planning might entail, including developing a lifetime tax strategy, considering asset allocation, and investing strategically.
1. Develop a Lifetime Tax Strategy
The goal is to pay the least taxes over time, not just in any one year. Here are a few possibilities:
- Defer Income: In the last and highest earning years of your pre-transition accumulation phase, you are usually in the highest federal and state income tax brackets. This is the time to maximize tax-deferred savings like 401(k), profit-sharing, and nonqualified tax-advantaged deferred-compensation retirement plans. You can then realize this income later, at lower tax rates, while you are busy pursuing interests that may bring you more joy than stellar earnings.
- Accelerate Deductions: Once your income is lower, it’s easier to meet the required income levels for taking certain deductions.
- Schedule Large Charitable Gifts: For maximum benefit, considering donating highly appreciated securities to a Donor Advised Fund during the final years before your transition. If you donate securities, property or partnership shares, you can usually deduct the charitable contribution for the full appreciated value of the property, and avoid paying capital gains tax. With this strategy, you get to take advantage of the charitable deduction at your higher tax rates, while funding your charitable giving into the future. It’s a win-win for your financial and charitable interests.
- Leverage Roth IRAs: Complete Roth IRA conversions or contributions during lower-earning years, and/or between retirement and age 72. In other words, paying some taxes upfront in lower-tax years may save you from paying higher taxes on the same money later on.
2. Consider the Importance of Asset Location
In general, we suggest holding stocks in taxable accounts, and bonds in tax-advantaged accounts. First, bonds are taxed at higher rates than stocks, so it makes sense to shelter these higher-taxed assets. Second, equity returns often come in the form of capital gains, which aren’t subject to taxation until you sell the asset from a taxable account. In a tax-sheltered account, you won’t pay capital gains taxes on a sale, but you will pay typically higher, ordinary income taxes on the assets when you distribute them later on.
In short, by holding stocks in a taxable account, you are more likely to minimize income taxes over your lifetime. Here are some additional tips related to where you locate your assets:
- Capital Gains vs. Ordinary Income Rates: Again, position equities in your taxable accounts for funding your life-style spending in later years, with their lower-taxed capital gains treatment. Consider holding fixed income in your tax-deferred retirement accounts, as interest on bonds are typically taxed at higher rates. Remember, Required Minimum Distributions at age 72 and beyond are subject to ordinary income tax rates, which are typically higher than the capital gains rate.
- Step-Up for Heirs: If you hold stocks in your taxable account until death, you currently get a step-up in cost basis, eliminating capital gains taxes for you and your heirs. This effectively makes the capital gains portion of the return tax-free if you hold the stocks for a long time.
- Charitable Breaks: If you are charitably inclined, you can donate appreciated shares instead of cash. When you donate appreciated shares, you do not owe capital gains taxes.
- Tax-Loss Harvesting: Holding stocks in a taxable account also gives you the option to harvest losses. Tax-loss harvesting allows you to use losses to offset current or future capital gains, or potentially to offset $3,000 of ordinary income annually.
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3. Investing Strategically
Structuring your long-term investment strategy according to a patient, science-based approach can feel unremarkable at times. Boring. And yet, an overwhelming body of research has shown that you can expect better outcomes by positioning your investment portfolio to simply and efficiently be there, ready to capture market returns whenever and wherever they may occur next. In contrast, trying to time market highs and lows, or pick winning companies tends to generate higher fees, higher taxes, and less desirable overall outcomes.
Beyond that, by accepting market returns from the asset classes in which you decide to invest, you can minimize the time you otherwise spend continuously rethinking your investments. This gives you more time to spend on the lifestyle you’re actually hoping to achieve, while your portfolio is optimized to financially support the same. This is another win-win for you, your family, and your lifetime wealth.
Life is uncertain. The market is even more precarious. This means building wealth has no shortcuts. Success requires a solid investment approach, a long-term perspective, and discipline to stay the course. Instead of leaving your financial future to chance, you need to have a plan.
Cogent Strategic Wealth is here for you.
So, instead of worrying about your future, why not take positive steps to protect it? Set up a Cogent Conversation with us today. We’ll show you how to transform your hard work into durable wealth even through troubling markets.
With our years of experience, we know a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets. Investors have had concerns and challenges in the past, and they know there will be concerns and challenges in the future.
We are here for one reason: to help you reach your financial goals, come what may. Contact us today so we can help you, too.
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