If you were born in 1964, you turn age 55 this year. Welcome to a major life transitions reset point!
Somewhere in one’s 50s, you realize that in less than 10 short years you will be age 60 plus...and you remember that not so long ago you viewed 60s as “old.” You were a teenager in the 1970s, formative years, with 8-track and cassette tapes pumping out the music of the time. Among the most “decade defining” songs of the ‘70s, per WatchMojo.com, were “Stayin’ Alive” by the Bee Gees, “Go Your Own Way,” “I Will Survive,” “Stairway to Heaven,” “Imagine,” and “Anarchy in the U.K.” by the Sex Pistols.
Well, with the Brexit mess we still have anarchy in the U.K. How are you doing? “Tryin’ to survive?” Still seeking your “stairway to heaven?” Working to “imagine” what’s next?
In your 50s you recall that your target for financial independence, perhaps “retirement,” the latter undefined, was in your 60s. That isn’t far away, and you have major challenges. Kids still in the nest to be educated and launched. Major expenses — home upgrades, cars for the kids, educations to finance, career problems and need for a change, medical concerns, aging parents. You want to “go your own way” but obligations, personal responsibility, and reality say “no way!” Here’s the “skinny”— begin planning with the end in mind, per Steven Covey.
What does financial independence mean to you in terms of investment, net worth and sustainable sources of cash flow relative to the life you want, and the sources needed to generate the cash flow desired (after tax income from investments, working at things you love, pensions, annuity income, debt free status)? Tax policy will have a major impact on your goal and net cash flow, as will inflation.
At a 5 percent takeout rate, recognize that a $1 million nest egg will generate $50,000 per year, or $4,166 per month. If that is net after-tax cash flow, your “financial independence bucket” must generate consistent returns of over 8 percent annually relative to taxes and inflation to sustain retirement cash flow without cutting into real principal. What’s your strategy to do that given volatility of equity markets and the virtual certainty of periodic market corrections and recessions in your post-working years? If you have sufficient “safe money” reserves in your portfolio to allow you to ride out storms, how much risk must your “growth portfolio” bear to meet sustainability goals?
Tax rates are as low as they are likely to be for the foreseeable future. Most of you reading this would like to have a $1 million nest egg or grow and sustain it if you have a million or more. You don’t want to be a burden on anyone, especially your kids or other loved ones. Yet millionaires are under attack and in the cross hairs of those who demand the “wealthy” pay their fair share. The Trump tax cuts expire in 2024 and won’t be renewed. There are proposals to raise Social Security payroll taxes, an increased burden on all workers, double for the self-employed. There is a proposal to tax “unrealized capital gains” as they occur, even if you don’t sell the asset.
If you may sell a major asset within the next 10 years, tax planning should start now, especially an interest in a closely-held business, low tax basis stocks, real estate, etc. What’s your strategy relative to that asset, such as a closely held enterprise or professional practice, to accelerate a “value-building process” so as to ensure the value you need to run your envisioned life is there? The same goes for real estate, non-publically traded stock in an enterprise where you own a meaningful stake, any venture of a profit-making nature? Are you aware of the ways to extract value from such assets? Do you know how to build assets and cash flows on a tax-favored basis, or even tax-free? Time and timing can play a role.
The Andrew Lloyd Webber/Tim Rice hit song from the 1970s musical, “Evita,” “Don’t Cry for Me, Argentina,” chronicled the short life of Eva Peron who rose from humble beginnings to First Lady of Argentina before her death at 33 from cancer. If you’ve attained or are shooting for “millionaire status,” don’t expect tax-writers and many of today’s voters to cry for you if taxes take a bigger bite out of your apple. You need strategies to grow, defend and harvest your apple crop in a way most beneficial to you, your family, loved ones, charities you support and the independence you’ve worked for. It’s smart financial farming, pure and simple.
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553. Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor (CEPA®).