One of my favorite TV shows was Game of Thrones on HBO. One of the sayings in the show was “Winter is Coming”. It was a foreboding quality for the protagonists that war with their enemies was coming.
In the past 2 years, the HFG team and particularly our Advisory Team have focused on our 3 unique qualities: (1) The Bucket Plan which is a defined retirement income process to provide reliable retirement income using a holistic financial planning process (2) Tax Management and (3) Our Advisory Career track of finding good financial advisors, training them, and increasing their skill level to serve our clients.
With Tax Management, we feel it is crucial for several reasons: (1) It is not what you make but what you keep (2) every investment decision you make has a tax consequence (3) True wealth management is the combination of investment management and tax management. Our Advisory Team really geeks out learning tax management and tax law because we know for our clients it is so confusing and important to them particularly in retirement.
As I write this, I am coming back from our semi-annual mastermind collegium with other top firms that focus on retirement income and tax planning where we talked at great length about these subjects. I also heard from some great speakers.
If you have sat in meetings with Melissa, Bryce, Michael or myself we have talked a lot about tax management. One of the challenges is that many people are focused on their taxes in the short-term exclusively. Although that is important, we want you to think more of the lifetime taxes you will pay. Actually, it is not even lifetime taxes but the post lifetime taxes that your heirs will pay on the hard earned money you have worked hard to build.
Many of us were told to build up as much money as we could in pre-tax 401k, 403B, and Thrift Savings Plans. The assumption is that you would avoid higher taxes during your working years and pay at a lower rate in retirement. For many of our clients with a lot of guaranteed income with pensions and Social Security that is proving not to be true.
However, the two biggest reasons, we feel that taxes are (1) The current tax rates that were established in 2017 under the Tax Cuts and Job Acts are supposed to sunset back to what they were in 2016. Not only are the percentage rates going up but in a lot of cases the thresholds that you reach the higher rates are hit at lower income levels (2) Is the more important reason. Right now our national debt is exploding at $31 trillion dollars and growing quickly. The dollar figure for each U.S. citizen is approximately $247K. I like to tell folks you don’t get to ring up the credit card without bill coming due. Not only are these numbers scary but we have additional unfunded liabilities from our entitlement programs of an additional $172 trillion.
Most of us do not understand the gravity of a trillion dollars and I just heard this from retirement income expert, Tom Hegna. If one dollar equals a second, a million dollars is 11.5 days, and a billion dollars is 32 years. A trillion dollars equals 32,000 years so $31 trillion is 992,000 years.
Now as you let all that sink in, yes as a citizen and professional I am concerned. One thing I have been telling valued clients, "You don’t get to endlessly put things on the credit card without it coming due." Nothing is certain but based on the past history of tax rates in the United States, we feel that over next 20 years tax rates could go up considerably beyond what is projected for 2026.
So what can you do:
(1) Switch your perspective from just reducing your tax burden now to your lifetime tax,
(2) Consider reducing contributions to pre-tax accounts so that all your liquid net worth is in pre-tax 401k and IRA accounts. Consider using more of the Roth feature in your 401k’s, 403B, TSP, and IRA. We consider Roth accounts what we call tax-advantaged.
(3) If you have accumulated significant amounts in pre-tax accounts, look into doing Roth IRA conversions particularly over next several years. One of the big planning tools we have talked with clients about who have huge amounts of excess cash who may want to potentially invest. Instead of investing that in post-tax accounts, you may get more bang for your buck using that cash to pay taxes to convert more of your IRA dollars to Roth. For us, Roth IRA assets are one of the best long-term assets you can have.
(4) Consider using cash value life insurance as a way to potentially use for tax free retirement income in retirement or as a means to pass on tax free assets to your heirs.
(5) If Roth IRA’s and conversions or cash value life insurance are not your cup of tea or practical, then long-term it may be preferable to have more money in post-tax accounts with after tax money. The principal you already paid tax on but the gains are taxed. One thing that is advantageous in these accounts is the use of municipal bonds.
One of the things we like to say is we can’t prevent winter from coming, all we can do is prepare. We can pull out the winter clothes, insulate the house, get firewood, etc. Start thinking of your long-term taxes on your retirement income. Remember it is not what you make it is what you keep. We are here to help. For your upcoming meeting, let Melissa Anne know that you would like to discuss and we will put on the agenda.