5 Wealth Protection Tactics

Key Points – 5 Wealth Protection Tactics

There Is a Lot of Risk Out There, But Much of It Can Be Avoided
Inflation and Taxes Are Wealth-Eroding Factors, But You Can Plan for Them
What Are Your Goals for Retirement?
A Team Approach to Financial Planning
20 Minutes to Read | 38 Minutes to Listen

If we’ve learned anything about what the market has done in 2022, it’s that being patient is pivotal. Rather than giving into fear and greed, Dean Barber and Bud Kasper share five wealth protection tactics to help give your clarity when financial planning.

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Show Resources:

Find links to the resources Dean and Bud mentioned on this episode below.

2022 Has Felt a Lot Like 2008

Dean Barber: Thanks so much for joining us for America’s Wealth Management Show. I’m Dean Barber along with Bud Kasper. What’s happening, Bud?

Bud Kasper: If it’s not the Federal Reserve, it’s the market. Whatever is going on is certainly impacting our lives today, isn’t it?

Dean Barber: Bud and I have had some conversations and we both agreed that what’s been happening in 2022 feels a lot like 2008. Of course, there are some unique differences. In January 2022, Bud and I discussed how If you had a 60/40 portfolio in January 2020, it was probably around 75/25 by December 2021. At that time, you needed to take some equities off the table and do some rebalancing.

Words of Wisdom from Warren Buffett About Fear and Greed

I don’t know the numbers, but I would guess that 90-95% of people didn’t do that. We have two very strong emotions that drive us from an investment perspective. Those emotions are fear and greed. Warren Buffett says it best, “Be fearful when others are greedy, and greedy when others are fearful.” Right now, people are fearful.

Does that mean that we should be greedy right now? Does that mean that everyone is wrong and that the markets are done going down, that everything is going to go up, that the Fed has magically done its job, and that inflation is going to go away and interest rates are going to come back down? I don’t think so. Bud and I are on the same page about that.

A Quick Rundown of 5 Wealth Protection Tactics

What Bud and I want to do today is discuss five wealth protection tactics. Let’s review those wealth protection tactics really quick.

Know Your Goals for Retirement
Avoid Unnecessary Risk
Plan for Inflation
Build a Forward-Looking Tax Planning Strategy
Work with Professionals

There are several ways in which your wealth can be eroded—all of which make these wealth protection tactics very important. Market risk is just one of those things. You’ve got interest rate risk, risk during your estate planning process, wealth erosion from excess taxation due to not having a properly crafted tax plan. The list goes on and on. We’re going to cover those things today before getting into wealth protection tactics.

I believe that everyone needs to tax a step back, look at their own situation, and understand where they are as far as risk in these different areas.

Bud Kasper: The problem is that if you don’t have a financial plan, how do you know how to measure that? We have the capability to show you what your probability of success is with the way you’re structured now. That offers an opportunity to change that structure in a way that is more meaningful, especially right now.

Buy When There Is Blood in the Streets

Let me give you a quote from Baron Rothschild, “Buy when there is blood in the streets.” Well, there is a little bit of blood in the streets. Look at some of the unique differences between now and 2008. People say that we’re in a recession because there have been two consecutive quarters of negative GDP growth. Well, there’s more to it than that.

The employment situation is vastly different. I believe that’s all caused by the stupidity of Congress from back in 2020 and the $5 trillion of COVID stimulus money when it wasn’t necessary to do that. What it really showed was the soft underbelly of American workers. A lot of them liked staying at home and getting a check without going to work.

Now, we have all these jobs and a lower amount of people that can fill them. The obvious question is, “Where did all the people go that had the jobs before?” One of the answers is my generation. Ten thousand people per week are retiring in America. Those are some of the most experienced and qualified workers that we’ve had.

Dean Barber: And a lot of times it takes two people to replace one of them.

Bud Kasper: In some cases, that’s true. We have a phenomena going on with that. And then we look at the 10-year treasuries and two-year treasuries. When you look at what is going on with the inversion of the yield curve, that adds more angst to the situation. That will provide some opportunities in some ways for us, but let’s relate it back to the only way that we can grade success. That’s with a financial plan.

And a Joke from Dean About the Wolf of Wall Street

Dean Barber: We talk about financial plans ad nauseam on America’s Wealth Management Show because we believe that’s the foundation of wealth management. Bud has been in the industry for 38 years and I’m about to celebrate 35 years next week. October 19, 1987, was my first day in the industry, and it just happened to be Black Monday.

Bud Kasper: That’s unbelievable.

Dean Barber: I like to joke that Jordan Belfort and I shared a desk, but I decided to take a different path. He’s the Wolf of Wall Street. I never knew Jordan until I read his book that he wrote while he was in prison. I didn’t know whether to laugh or cry when reading it!

How Much Do You Need to Retire?

The biggest risk that me, Bud, and all our CFP® Professionals hear about from people is the risk of running out of money. That is one of the things that is one people’s minds as they head into retirement. They want to know that they can take all the income they need throughout their life, keep up with inflation, pay for potential health care issues as they arise, potentially fund their grandkids’ college educations, and all those things. How can they know how much they can spend for all those things and not run out of money?

That’s where the plan comes in with the ability to show them their probability of success. It provides real clarity. When you’re working, you have the clarity. You know your paycheck is coming in. You know your taxes are already being withheld. And you know how much is going into your 401(k) and bank account, how much you can spend, and what you want to save, etc. You have clarity.

Clarity Is Crucial as You Prepare for and Go Through Retirement

Well, you need that same clarity as you approach retirement so that you can truly enjoy the things that you want to do. You can get started on that by building your financial plan with our industry-leading financial planning tool. It’s the same financial planning tool that our CFP® Professionals use with our clients, and you can use it at no cost or obligation. It covers all five of the wealth protection tactics that we’re about to dive into momentarily.

We know that there’s risk at some level in just about every single investment out there. You even have risk in fixed assets like CDs, fixed annuities, or U.S. treasuries. There is a risk to those. And the risk on those is inflation risk. It’s the risk that inflation will outpace the return and therefore diminish your purchasing power and cause you to eventually dip into principal to generate the income that you need.

Even what some people would consider the safest investments out there do have some sort of risk. I want people to understand that. We can show that in the plan. Bud and I have gone through this multiple times. Our CFP® Professionals can go through it with you.

1. Know Your Goals for Retirement

Now that we’ve set the stage for reviewing these five wealth protection tactics by highlighting different types of risk, let’s go over No. 1 on our list. It’s knowing your goals for retirement.

Once the plan itself is created, we can show the optimum asset allocation to achieve your objectives with the least amount of risk possible. And remember, when you’re heading into retirement, the number one risk is running out of money before you run out of life. That is the number one risk, not being able to live the life that you want.

2. Avoid Unnecessary Risk

This leads right into our second wealth protection tactic, which is to avoid unnecessary risk. Once we understand the life that you want to live and what that life is going to cost, we start putting in different asset allocation strategies. Some of you may have enough money that you can be 100% in cash. You can be 100% in a fixed investment and still never have to worry about running out of money. But in most cases, if someone has so much money in fixed assets and nothing in assets that are going to give them potential for better long-term returns, it diminishes their probability of success.

On the flip side of that, if you get too much into equities or risky strategies, that can also diminish your probability of success. So, to determine risk that you don’t need to take—unnecessary risk—you need to have the plan in place.

Bud Kasper: I agree with that wholeheartedly. I’ve said that many times to our clients. Why would you take more risk than is necessary to complete your plan?

Dean Barber: Because they don’t know what risk is necessary. That’s the point.

Bud Kasper: That’s our job to identify that so they have a tangible way of understanding what risk is. I mentioned the word dynamic, meaning that you need to sometimes change your allocation to withstand the conditions we find ourselves in presently. That in and of itself should be the coordination between the financial planner and the client to understand each other so that we can build the solutions that are comfortable for our clients.

How Bonds Fit into Your Portfolio

Dean Barber: Absolutely. And there is that Goldilocks portfolio for everyone. That Goldilocks portfolio is the one that’s going to be just right for you based on your own personal set of circumstances and what your objectives are. But when we talk about unnecessary risk, think about this. The bond aggregate is off by almost 16.5% so far this year. That’s a loss of 16.5%.

Bud Kasper: Wait. That’s our safe investment.

The Relationship Between Bond Prices and Interest Rates

Dean Barber: It’s always been said that bonds are a stay-rich asset and stocks are a get-rich asset. On the face of it, an individual bond is a stay rich asset. Every bond is issued and matured at something called par value. Par value is typically $100 per bond. Your bond is going to fluctuate in value up or down from that $100 depending upon the interest rate of that bond compared to the current interest rates.

Think of the relationship between bond prices and interest rates like a teeter-totter. If you put bond values on one end of the teeter-totter and interest rates on the other end, they do just the opposite. As interest rates are rising, bond values are falling.

But let’s say that you had an individual bond that you paid $100 for. It was a 10-year bond that was getting 4%. If you hold that bond for the full 10-year period, you’re going to get your 4% every year. At the end of that period, you’re going to get your principal money back.

But if you want to try to sell that bond in between times and interest rates have moved higher, nobody is going to want to buy your 4% bond when they can go out and buy a brand new one at 5%, 6%, or 7%.

There’s a Bind in the Bond Market, But Does Opportunity Await?

Bud Kasper: Exactly. And that’s a conundrum that people are facing right now. Just last week, a very wealthy client of mine went into the municipal bond market and bought several bonds at this level. Why? Because the prices are depressed, yields are up, and it gives him the comfort level of knowing what Dean just said. His par value, principally, will be returned to him.

Dean Barber: Right. Bud and I could do a whole show on that topic. We probably will before the end of the year. I think there’s going to be an amazing amount of opportunity created if you’re willing to wait a little bit.

What Are Municipal Bonds?

Those of you that don’t know what municipal bonds are, they’re simply tax-free bonds. They’re bonds that are issued to municipalities. And if they’re issued in the state that you live, then they’re state income tax free and they’re all federally income tax free. So, they can provide some good tax benefits for those in higher tax brackets.

I was just looking at building a portfolio of munis for a client this last week as well. We were looking at somewhere between 4% and 4.5% yield with some high-quality munis. If Jerome Powell and company keeps raising rates to the point where he pushes our economy into a recession, what’s going to happen? Bud and I agree that that’s the direction that we’re headed.

Interest rates are going to have to come down again when we go into recession. So, if we’re buying those bonds at a good price today, and interest rates come back down in the future, it’s potentially a place where you could get double-digit type returns. And the interest on that would be tax-free. Any appreciation in those municipal bonds would be taxed as long-term capital gains if you choose to sell those 18-24 months from now.

Remember When Traditional Bonds Were Safe?

Bud Kasper: And the other reality is that most people are investing either in mutual funds or ETFs for their municipal exposure. The issue with that is with the rising interest rates as they are, a 16% decline in bonds, and then the current status of the S&P 500, in a typical 60/40 portfolio, you are underwater. The one on the side of the portfolio that we were counting on being safe is no longer safe because of the interest rate scenario we’re in right now.

Dean Barber: Just to put it in perspective, a 24.7% loss is where we’re at on the S&P 500 so far this year and the 16.37% loss on the bond aggregate. So, if you had a 60/40 portfolio, you’re down greater than 20%. And most people say that 60/40 portfolio is a balanced portfolio.

There’s usually so much hype about just buying the indexes—the bond agg and S&P 500 index. People just do their 60/40 and let it be. Well, how are you feeling today with your 60/40 portfolio down 20%?

How Your 401(k) Factors into the Equation

Your 401(k) is a big part of that as well. Unfortunately, you have fewer options inside of your 401(k). Bud, Matt Kasper, and I talked about this last week. Once people understand what their portfolio needs to look like, start with your 401(k). Pick the best of the best that’s in that and then build the rest of your investments around that.

We have the ability through our financial planning tool to help you manage your 401(k) and do all that for you as it fits into your overall plan. But you need to know how it fits into your overall plan. You need to know how you avoid unnecessary risk. And to do that, you need to start planning.

3. Plan for Inflation

Let’s move on in our discussion about five wealth protection tactics. Bud and I have been talking a lot about market risk, interest rate risk, and avoiding unnecessary risk. But there are a couple of wealth protection tactics that don’t have anything to do with risk as far as volatility and investment risk but can still be wealth eroding factors pre-and post-retirement.

Inflation Won’t Cause You to Go Broke, But Can Make You Live Like You’re Broke

Of course, two of the big ones are inflation and taxes. Inflation is insidious, invisible, kind of the silent, and stealth. That’s why planning for it is our third wealth protection tactic. I’ve never seen inflation cause somebody to go broke, but inflation will cause you to live like you’re broke because you don’t think you can afford to do those other things anymore.

Bud Kasper: That’s a Dean Barber quote folks. If you haven’t heard that several times over the years, you’ll remember it now.

Dean Barber: Remember, inflation doesn’t cause you to go broke, it causes you to live like you’re broke. And who wants to live like they’re broke?

Let me give an example. You’ve got inflation and a horrible market condition in the stock and the bond markets. The husband of one of my clients passed a couple of years ago. After her husband passed, we talked about what she wanted to do with her life now. One of the things that came out of our super long conversation was that she wanted to spend as much time as she could with her kids and grandkids.

Keeping Family First

She wanted to get the whole family together at least once a year. Her goal was to plan a big vacation that she paid for everyone to get to. Her family can plan these events two years in advance so that everybody can get time off work and plan around the school year, and those types of things.

She asked me if she had enough money to do that, and I said there was only one way to find out. That was to seriously talk about what those trips are going to cost and then build them into her plan and see what it does. We needed to see if she would need to sacrifice anything to make that happen.

What’s Your Probability of Success After Planning for Inflation?

As we built it into her plan, we found that she still had a 95% probability of success. She can take those trips and 95% of the time, she won’t need to adjust her spending on any of the other things that she’s currently looking at.

Well, she was in our office back in July, and they have a big trip coming up in December. She was very nervous about spending that money now with things getting more expensive. She was about to make the mistake of living like she was broke and thinking that she didn’t have enough money. And that’s what inflation can do to you.

So, we went back and reviewed her plan with her current values. We inflated the cost of the trip by 8%, which is about what inflation has been over the last year. We did that to see how it would impact her probability of success.

And do you know what it did? It changed her from probability of success from 95% to 94%. She could take the trip, have fun, and enjoy it. The look on her face and the joy that she has in knowing this hasn’t affected her ability to do the things she wants to do is monumental. You can’t put a price tag on that.

Again, There’s Clarity That Comes with Financial Planning

But had we not done the planning work to get that clarity of everything else that she wanted to spend, she may have canceled that trip.

Bud Kasper: Planning is a beautiful thing, especially when it can really bring in what Dean just demonstrated with that story. It’s a reassurance that what people want to do is still a possibility even in these times that seem so dire. We’re dealing with Vladimir Putin and the Ukraine situation. We’ve had some very big economic issues. People are worried about it and how could you not be in that environment?

What Is This Double Negative Compounding That Bud Speaks of?

In fact, I came up with a phrase called double negative compounding. I do that because it talks specifically about retirees. They’re getting a down market at the same time they’re taking Required Minimum Distributions. Well, what can you do? You immediately think that you need to get your returns up or maybe need to adjust on the income side of things.

But as Dean alluded to, if we take that double negative compounding, put it back into the plan to find out how much it truly impacted the future of the plan, we find out that it oftentimes doesn’t make a lot of difference.

Dean Barber: You’re right.

Bud Kasper: Why were you laughing at double negative compounding? Come on, you just wish you had thought of it.

Dynamic Withdrawal Strategy

Dean Barber: That’s a Casperism. So, do you remember the five different financial planning techniques that can add as much as 22.6% more income? They’re in a white paper by Morningstar that’s written by David Blachett and …

Bud Kasper: Paul Kaplan.

Dean Barber: Yeah. And the idea was that there are five different financial planning techniques that can add as much as 22.6% more income regardless of your portfolio. It’s all about the planning techniques. One of them that Bud reminded me of with his double negative compounding was something called a dynamic withdrawal strategy. We haven’t talked about dynamic withdrawal strategy in quite some time, so let me tell you what it is.

Let’s just say that when you build your plan based on the resources that you have that your distribution rate on your portfolio is 5%. That’s what you need your portfolio to produce is 5%. And that is an average over time. If that’s all you’re getting, then you can’t keep up with inflation.

Harvesting Large Gains

The dynamic withdrawal strategy is simple. In a year where your portfolio gains more than 5%, you take that excess and you set it aside in a super safe position. That can create part of or all your income for the next year. Over the last couple of years leading up to this mess of 2022, we’ve had some situations where people’s portfolios were up in double-digits, 10, 15, 20%.

The idea is to take those excess gains and harvest them. You don’t have to take them out of your account. Just take those and put them into a very safe position so that you now know that you’ve got your money for your lifestyle, your withdrawals, already there.

That reminded me of a meeting with a client from two or three months ago. He was nervous about the markets. I said, “Don’t you remember we did that dynamic withdrawal strategy? We’ve got five years of income sitting in this bucket over here. We can invest like you’re five years younger again with the rest of this money. These ups and downs of the market aren’t going to cause us to sell off at a low position.”

The Rip Van Winkle Syndrome

Bud Kasper: That creates the Rip Van Winkle Syndrome. If you fell asleep and all this stuff is going on and you woke up a year later and everything’s back to normal, what did you have to worry about? Nothing.

4. Build a Forward-Looking Tax Planning Strategy

Dean Barber: Exactly. Well, I briefly touched on the fourth of our five wealth protection tactics earlier, which is building a forward-looking tax planning strategy. One of the things that Bud and I talk about the most on America’s Wealth Management Show is paying as little tax as possible over your lifetime. We’ve said this many times that if you live in America and you have money or make money, taxes will be a fact of your life.

The question is, how can you pay the least amount of taxes possible, not in just a given year, but over your entire life? That’s when the CPAs review the financial plan that our CFP® professionals have put together for tax saving opportunities. In many cases, we see those tax saving opportunities, if they’re applied correctly, outweighing the Social Security planning strategies.

The Tax Savings That Can Come from Tax Planning Strategies

We know that an average couple age 62 is going to have somewhere north of 600 different iterations on how they can claim their Social Security. And the difference between the best and the worst claiming strategy has the potential of adding $100,000 or more of additional income over the same life expectancy.

Tax planning strategies can add even more than that in tax savings. That allows you to take less risk with your portfolio or to spend more money throughout your retirement and enjoy your life.

Bud Kasper: Why would you take any more risk than is necessary to complete your plan the way you have it designed? One thing that drives me crazy is when people say they’re getting a refund this year.

Dean Barber: If you’re getting a refund, that means you paid more than what you should have throughout the year.

Bud Kasper: Right. You gave the government a chance to make money on your money.

Tax Diversification in Retirement

Dean Barber: Forward-looking tax planning looks at all the resources you need to gain income from in retirement. And in retirement, you can control your taxes unlike any other time in your life.

You’re going to have assets that are tax-deferred such as your IRAs and your 401(k)s. You’re going to have assets that are taxable like your joint account, trust account, and bank accounts. And then you’re going to have assets that are tax-free such as municipal bonds or Roth IRAs.

You’re also going to have income that may be taxable and it may not be taxable. That is your Social Security. There’s a formula that’s used to determine how much, if any, of your Social Security is taxable.

And then, you’re going to have dividends and capital gains that if qualified, may be tax-free, or you may pay taxes up to a total of 23.8% if you’re in a high enough tax bracket where you’re using the 20% plus the 3.8% Obamacare surtax.

Understanding Tax Diversification Before Retirement Is Also Important

When you get into retirement, you have all kinds of different options if you’ve done a good job of tax diversification. Understanding tax diversification is something that you really should begin prior to retirement.

Bud Kasper: It’s fundamental to the plan.

Dean Barber: Absolutely. You can then control which bucket you take money out of, at what time, and how you combine those different income sources together to pay the least amount of taxes possible.

For example, let’s say that someone wants to get $7,000 into their checking account after taxes every month to do everything that they want to do in retirement. We’re going to look at all the different resources and then our CPAs are going to determine how to source that income and the things to do to reduce your tax burden over time.

When the CPA understands the full concept of what you’re trying to do as they’re working with the CFP® professional, then magic starts to happen. You get to see meaningful tax savings over time.

The Misconception About Social Security

Bud Kasper: Yes. I used to show tax diversification on a whiteboard. It illustrates the point we’re making with this. A lot of people think that Social Security is tax-free. They think that they don’t have any taxes on it. And of course, there’s that threshold and a formula that needs to come up with that.

Dean Barber: Social Security is tax-free unless you disqualify yourself.

And Don’t Forget About How Medicare Costs Can Be Tied in

Bud Kasper: That’s right. Now, the other part of it is, how many people that are thinking about Social Security think about how all that might impact their Medicare costs?

Well, that’s part of the plan. If you don’t know all the intricacies associated with getting the income in your pocket in the least taxing way, then you’re missing out on an opportunity. And it’s only because you haven’t taken the time to talk to a CFP® professional about what’s specific to you.

5. Work with Professionals

Dean Barber: Exactly. That brings us to our fifth wealth protection tactic—working with a professional. This is where the team approach that we have structured is something that is unique for our clients. I’m going to share with you shortly about how you can visit with one of our professionals and determine if what we do is right for you. If you’d like to talk to us about becoming a client, we’re more than happy to do that.

But the team approach is unique. It starts with the CFP® professional creating the plan. Then, the plan is reviewed by the CPA. The CPA looks for tax savings opportunities. The plan is then reviewed by our risk management team. They look at whether you have proper insurances across the board—everywhere from property and casualty to Medicare coverage, supplemental coverage, to long-term care, life insurance, those types of things. We’ll review all of that and make sure that you’re adequately covered there.

And then, our estate planning liaison will review your estate planning documents. They’ll look if everything you have buttoned up the way that it should be. Money transferring from one generation to another can lead to some wealth erosion as well.

Gaining Clarity from a Team Approach to Financial Planning

We look at all those things. The entire team then sits down with the client and shares what they see. Everybody’s on the same page. No longer do you have to be in a position where you’ve got a planner telling you one thing, and then you’ve got to relay that to your CPA, and then your CPA tells you something, you’ve got to relay that to your attorney, etc. It can go around and around that way. Those people don’t speak the same language. They all speak different languages.

Working with the entire team is important. I tell people all the time that ultra-wealthy people expect the team approach. But those of you who are mass affluent, the millionaire next door, not only do you not expect it, you don’t even know that you can get it. That’s crazy. Most firms aren’t built to deliver that.

Do You Have Questions About These Wealth Protection Tactics?

To learn more about our team approach, these wealth protection tactics, and how we go about financial planning, you can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® professionals. And before you meet with them, you can access our industry-leading financial planning tool from the comfort of your own home. It’s the same financial planning tool that we use with our clients. Just click the “Start Planning” button below to start building your plan today.

START PLANNING

And if you have questions when using our tool, our CFP® professionals can screen share while using the tool when they’re meeting with you.

Bud Kasper: There’s something about that team approach that I need to share from my personal experience. The confidence that we already have in terms of building out plans is underscored when you get another professional that comes in that adds a better outcome. We put our heads together.

This team approach provides us the optimal opportunity to secure your retirement and the other objectives that we have, such as income and legacy, etc. Hopefully you find these wealth protection tactics to be beneficial.

Turning Lemons into Lemonade

Let me make one final point here. It’s about turning lemons into lemonade. We’ve had a lousy market. If you’re in a taxable account and you have tax loss, are you doing any tax-loss harvesting?

Dean Barber: There are wealth protection tactics that everyone can put into place. But you need to know what’s right for you. The only way to do that is to build a plan.

We appreciate you joining us here on America’s Wealth Management Show for our discussion on wealth protection tactics. I’m Dean Barber along with Bud Kasper. Everybody stay healthy, stay safe. We’ll be back with you next week. Same time, same place.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.