Transcript

Carlos: Hi, I’m Carlos Lopez.

Tamara: And I am Tamara Lowenberg. Thank you for joining us today. Today, we’re going to talk to you about how to build an unshakeable retirement plan. You’re diligently saving and investing for retirement. Don’t let that work be undone by a retirement plan that isn’t strong enough to weather all that life has in store with you.

Carlos: We’ve got you covered. Today we’re going to share several tips to help you build an unshakable retirement plan.

Tamara: So on our agenda today, we’re going to look at common retirement concerns and why they’re really not a problem. We’ll also show you how to build a plan to be unshakable and next steps in becoming a Creative Planning client.

Carlos: So let’s get started.

Tamara: So what are some of the most common retirement concerns? Most other advisors will tell you that retirees really worry about outliving their assets, taxes, inflation, market volatility, but that really is not a root cause of all problems. Those are only symptoms of really, a much bigger problem, not having a retirement plan and a plan for the future. The best plan addresses all of those issues, and it must start with where are you today and where you are going. We will help you build a retirement plan to be unshakeable and to squeeze the most happiness out of your financial life.

Carlos: The key to solving your retirement challenges is to build an unshakeable retirement plan. Let’s walk you through the steps here at Creative Planning for when you become a client. The very first thing we’re going to do is build a retirement plan for you. This involves talking a little bit about your assets, your liabilities, your income sources, and certainly your expenses in retirement. Next we’re going to evaluate what the demand is going to be on your portfolio as you live through retirement. Then we’ll talk about a very detailed restructuring of your plan. Your current portfolio consists of things that you’ve held onto for maybe many years. It could be concentrated positions. You’ll have unique desires as you think about how you want your portfolio to be built for you to develop an income stream in retirement. So we’ll help you to come up with a customized solution for that.

Let’s not forget taxes. Taxes are an important part of our evaluation. We want to make sure that your portfolio is structured to meet those demands. Finally, after we create your plan for retirement, we also want to be thinking about the legacy you’re going to be leaving behind, and we’ll take a look at your current estate plan to make sure it’s in great shape. If it’s not, we’ll make some changes for you. So let’s get started with step number one. How do we build a plan here at Creative Planning? First things first, we need to get a thorough understanding of your current financial situation. This includes assets, for example, where are your accounts today? How are they structured? What do you own in them today? What do you like? What are some things that you might want to change? We’re going to look at your liabilities. Many retirees enter retirement with mortgages, car loans, credit card debt, and some are free and clear of any liabilities.

Next, we’re going to look at your income sources. For us, a lot of our clients we see have many different sources of income. Perhaps it’s just social security, but many clients also have pensions. Some will work in retirement. Some may even have rental income or other sources. So we’ll evaluate those sources of income and how they might change during retirement. Finally, we’re going to look at your expenses. What’s the lifestyle that you want to have in retirement. Is it a lot of travel? Is it perhaps spending more time with the grandchildren? Perhaps it’s to develop a wealth accumulation for the next generation. We’ll help you generate a plan that’s customized for you. At Creative Planning, we have a thorough discovery process where we’re going to be focused on understanding your current situation, where you’re beginning and where you want things to end. We have a thorough discovery process because we want to understand whether you’re in the accumulation phase and saving for retirement or you’re in retirement or what we call the distribution phase and you’re taking money from your current portfolio.

During this time, we’ll understand what your sources of income are, what your expenses look like and understand how far those income sources are meeting your expenses. The gap between where your income sources end and what your actual lifestyle looks like will ultimately be the demand on your portfolio. From here, we’ll help you structure a portfolio to build an unshakable retirement plan.

Here’s a hypothetical example of what your potential plan could look like. So we’ll evaluate your accumulation phase, how much you’re saving in retirement. We’ll look at what your current assets are and how many years you have left for retirement. And we’ll build in hypothetical inflation rates, hypothetical growth rates, to give us a good understanding of where we stand today and where this plan might be headed.

In the distribution phase, you’ll see, in this column, on the third from the right, we’re actually looking at the demands from the portfolio, how much are we actually needing to take from the portfolio in order to meet your lifestyle. In step two, we’re going to evaluate the demand you have on your portfolio. What does your portfolio need to do for you? For many of our clients, it may need to be to generate income in retirement. For others it could be wealth accumulation for the next generation. Perhaps you’re philanthropic, and you want to focus on gifting strategies to your favorite charities or even gifts to your family. Perhaps it’s a combination of all of these things. We’ll be focused on what’s most important for you and build a customized solution that can help meet these demands on your portfolio.

Tamara: In step three, we will help you restructure your portfolio to meet your needs in any economic environment. But we have to consider three things. First, your preferences. Through our consultative approach, we’re going to help understand what is your risk tolerance and how much volatility are you willing to accept so that we can really build a plan that can help you sleep well at night, no matter what market environment we encounter. We also have to make sure that your portfolio aligns with your investment values. You might have certain preferences for certain holdings. Maybe you inherited certain assets throughout your family. And those we will consider keeping as long as they’re appropriate given your risk tolerance and where you are in life today. Existing holdings might also have pretty significant tax implications if changes are made. We will consider those and we will also consider the tax impact of any income distributions and whether these types of investments are held in the most favorable account of yours.

Let me provide you with an example of what this may look like and how building a retirement plan that’s really custom to your needs can help someone get that peace of mind to step into that retirement phase in their life. Several years ago, I was introduced by a client through another client. And at that time, this family had saved significant amount of wealth. Beyond most of people’s comprehension that people in that situation could even be concerned about whether they have saved enough and can they comfortably retire. However, what they didn’t have is that emotional comfort level and a tangible plan to help them make that decision. We took them through the process we just described. They had severe concentrated risk in their portfolio, made up of just a few equities. And we were able to not only build an income plan, but also advance estate planning techniques and various irrevocable trust to help them save money on taxes, help them diversify, help them build the income to provide for retirement.

And I will never forget that they, following this recommendations meeting, the client notified me that he gave a notice and retired. So how do we build an unshakable portfolio? First, we have to understand that it is not uncommon to live 30 to even longer years in retirement. Most people as they approach retirement, they think that now I have to change my whole portfolio to shorter term investments and take no risk to address inflation. But in reality, we need to create a portfolio to address the growth and inflationary risk and to really be able to provide for those future years. For those of you currently in retirement or approaching retirement to really become unshakeable and help us endure any recessionary risk, market volatility, and economic cycle in downturns, we really need to be able to create a pool of assets, such as short term fixed income, highly liquid low volatility type of assets that we can tap into over the next three to five years and help us really weather that storm that we might encounter.

Carlos: As Tamara mentioned, it’s important to have a good portion of your portfolio dedicated towards growth. These growth investments can include stocks, certainly sub-asset classes from around the world, real estate, and possibly alternative investments like private equity. The reason these are important is because we need to make sure that the portfolio is growing to keep pace with inflation. As you know, interest rates are rising right now. And as that we’ve seen, they can impact a market. So as you look at this next table, take a look at the fourth line down. Here’s a period of 1976 through 1981, nearly five years where interest rates were increasing. In fact, you can see that the 10 year treasury yield rose about 9% over that timeframe and equities kept pretty much pace with that rise in interest rates. You can also look at different years here and get a good feeling for how equities might relate to rising interest rate environments.

This is why it’s important to have a portfolio that’s designed to grow over time. In addition to growth, we want to make sure that you have a portion of your portfolio dedicated to income sub-asset classes. These could include things like bonds. At Creative Planning, in an ideal portfolio we’d like to see three to seven years worth of your future or current income needs dedicated towards bonds. Why is this important? First, and especially in retirement, it helps to reduce volatility in your portfolio. Second, these bonds become a reliable source of income during periods of a prolonged market downturn. For example, let’s say the market is having a significant pullback. You certainly don’t want to be having to sell stocks in a down stock market in order to generate an income stream. Instead, you can pull from those bonds for a prolonged period, again, three to seven years, without having to sell stocks and realize those losses on that stock market activity.

It’s also a way for us to stay invested. At Creative Planning. We don’t want to keep too much in cash in your portfolio. Cash doesn’t work for you very hard and we want to make sure that in this rising interest rate environment, you’re benefiting from these income classes that are seeing these yield rise over time. And finally, it allows us to opportunistically rebalance your portfolio. What does this mean? This is where we focus on taking advantage of market downturns throughout your entire retirement or your accumulation phase to buy stocks while they’re down by selling bonds at that time. We know that we want to stay invested over your lifetime and having the right mix of equities and bonds in your portfolio is crucial to making this reality and an unshakeable plan work for you. As I mentioned earlier, it’s important to stay invested in your portfolio. Even during periods like this of higher volatility. Today, I’m showing you a slide that gives you an idea of what that volatility has looked like since 1980 and helps you to understand that volatility is a very normal thing.

So whether you’re in the accumulation phase and saving for retirement, or you’re retired and you’re in that distribution phase, volatility isn’t going to go away in the market. It’s how we build and structure your portfolio that’ll help you determine how you endure it. Let’s take a look at this slide in more detail. Here you can see from 1980 through about 2021, that we have periods of volatility every single year. If you look at the graph above 0%, you can see these are the years where the S&P 500 actually ended positive on December 31st of that particular year. If the gray bars are below that 0% line, that shows you the years where the S&P 500 actually ended negative for that particular year on December 31st. And you can see about three quarters of the time, markets are positive. And about one quarter of the time, you’re going to experience a negative return in the S&P 500.

This is normal, and we can anticipate it. But in every one of these years, you see a red dot. These red dots indicate the lowest point in the market as measured by the S&P 500 for that particular year. Did you know the average low inter-year return was a negative 14% on average over this time period? Negative 14%. So volatility is normal. And just because you have an intra-year low, that doesn’t mean that’s where you’ll end up for the particular year. We know by investing for the long term and having an unshakable plan is going to help to make sure that you feel comfortable with the plan that we build for you. At Creative Planning, we want to build a diversified portfolio for you. So your portfolio is going to include several different asset classes that will make up a diversified unshakeable retirement plan.

Again, this may look different in the accumulation phase versus in your retirement or distribution phase. Now we don’t know for sure which asset classes will perform in any one year versus another. For example, take a look at this slide. In 2012, emerging markets was the best performing asset class, but by 2018, it was the worst. So we’re not trying to guess which asset class is going to perform better or worse in any one particular year. Rather, our focus is to build a portfolio that consists of many different asset classes to hopefully prepare you and your portfolio for retirement, and to endure volatility over time.

Tamara: Now that we’ve seen what constructing optimal portfolio looks like, let’s take a look at what are some of the biggest headwinds to investing, and those are taxes. We all know it’s not what we make, but what we keep, therefore we need to consider following strategies to be able to keep most of what we make. Number one, tax efficient draw down strategy. We can also employ tax laws harvesting. We can also determine where to locate certain types of investments as not all investments are equal when it comes to tax implications from those distributions. Finally, we’ll look at whether Roth conversions make sense as someone is approaching minimum required distribution stage of life. And finally, we’ll look at strategic gift giving and the most optimal ways to accomplish that.

Now that we’ve seen what most optimal portfolio would look like, let’s look at what are some of the biggest headwinds to investing, and those are taxes. We all know it’s not about what we make, but what we keep. So let’s consider a few strategies to help us become very tax efficient. Number one, tax efficient draw down strategy. Number two, tax loss harvesting. Number three, asset location. Where do we keep what type of investment? Number four Roth conversion versus when do we start minimum required distributions, and finally strategic giving. Let’s consider tax efficient draw down strategy. First, we want to understand what makes up your portfolio in terms of the type of accounts and assets that you hold. We want to create a plan to not put you in a higher tax bracket. We want to also consider the unique circumstances, such as concentrated positions, how much of capital gains we’re realizing each year. Do you have any other income coming from other sources and really make sure that by drawing from certain types of accounts, we’re not increasing your Medicare premiums and we’re not creating unnecessary tax burden.

Our wealth managers can work in conjunctions with our tax team to arrive at a solution that best meet your needs while considering your overall tax implications. So now let’s consider one of the biggest freebies that many investors get that is very frequently overlooked, tax loss harvesting. As we know, markets don’t just go up. Carlos was just showing you how every single year we experience a market decline of about 14%. Those times provide us with an opportunity to sell an investment that has declined in value and buy a very similar investment that is highly correlated to the one we just sold. This process will result in creating a loss that’s reported on your tax return that can be utilized down the road in future years as you realize capital gains, sell properties, sell appreciated holdings, you can also deduct up to $3,000 of losses per year to offset your ordinary income. This process is really performance neutral. There is no impact on your overall return or a risk profile.

And this is why we really consider this whole process as making the lemonade out of lemons, taking advantage of a market decline, and maybe not the best feeling in the world to make the best of the situation for the long term. Let’s consider this example in a chart. Let’s take a look at tax loss harvesting in the actual example of a year that many of us will never forget, 2020. In this graphical example, we’re seeing by the yellow line, what would it look like if we invested a hundred thousand dollars in January of 2020 by March of 2020. Investor would’ve experienced pretty significant decline of about 34,000. If at that time, you have made a change and sold the investment at a loss and bought very similar investment as depicted in a blue line you would’ve actually captured the loss, which would be reported on your 2020 tax return, but ended the year positive. The benefit to you is that we ended up with a loss on your tax return, and this performance neutral trade ended the year on a positive note, and you can actually use those losses in years to come.

Another big consideration when we structure your portfolio is where we’re keeping certain types of investments. Not all investments are created equal as it relates to distributions from those types of assets. For example, we know that bonds, taxable bonds specifically, are not very tax efficient and therefore they should be held in tax deferred accounts, such as your IRA or 401k. Similar goes for foreign equities. This is why we want to make sure that each type of investment is held in the most optimal account. Just like as you build your home, you would want to have the right furniture in the right room. This is why we make sure that equities are found in taxable accounts and non-tax efficient asset found in retirement accounts.

Carlos: You may be considering a Roth conversion in your accumulation phase or in your distribution phase. This is a very important consideration that you should work with your wealth manager and your CPA at Creative Planning to determine if this makes sense for you. Roth conversions can have unintended tax consequences such as raising you into a higher tax bracket potentially, potentially triggering net investment income taxes on capital gains. And in addition, they could trigger higher Medicare premiums for you down the road. So it’s really important to understand these implications before you start. Roth conversions, however, have many tax benefits. When you convert to a Roth, you may have a taxable event as a result of the conversion. The idea, however, is that once you put the money into a Roth, that money will grow tax exempt if you follow the IRS rules about future distributions. You can expect your income to rise in the years that you make those conversions.

So it might make sense to complete a Roth conversion before you have to take a required minimum distribution at age 72. Now, because a Roth conversion is a taxable event, again, it’s really important that you work with your wealth manager and your CPA to understand your important individual circumstances, because a Roth conversion cannot be reversed going forward. As we round out our conversation on taxes, whether you’re in the accumulation phase or the distribution phase, there are three effective ways that you can potentially give either to charity or to family. One is through a donor advised fund where it’s most convenient to donate low basis securities to a charitable account that you control. In this account you get a couple of different potential tax benefits. One, you benefit by not having to pay the capital gains tax on that low basis security that you just donated.

Plus you may also get a deduction for the full fair market value of the stock that you donated. Second, it may be more advantageous for you to consider, at the right time, a qualified, charitable distribution from your IRA or from your 401k. At the right time, your wealth manager can work with you and your CPA to determine the best strategy for pulling money out of your IRA account and avoiding taxes on that distribution if that distribution goes directly to the charity. Finally, we can help you to make gifts to your own family during your lifetimes. Many times clients make the assumptions that they can only pass on wealth after they’re gone. It’s simply not true. In fact, you can gift as much as you’d like over your lifetime through strategic gifting trusts. Let’s round out this discussion on taxes by discussing strategic ways of giving to charity.

Many of our clients are very charitably inclined and are always looking for ways to effectively give to charity. Many of our clients, however, mistakenly give just cash donations to charity, when actually it’s probably more effective in many cases to donate low cost basis securities instead. Those appreciated assets will potentially avoid capital gains taxes and give you a full fair market value deduction for the actual value of the stock on the day of the gift. There are a couple of different mechanisms also for gifting to charity. At the right age, you can also make distributions directly from your IRA. Up to $100,000 can come from your retirement accounts after age 70 and a half, to be able to make distributions to these qualified charities. These distributions, if they go directly to the charity from your IRA, are not taxable income. Finally, we’ll talk about three other ways that you can potentially give to charity.

These could include setting up a charitable trust, like an irrevocable trust, a donor advised fund, which is a sort of charitable savings vehicle that you can utilize in both the accumulation and the distribution phase. And for some of our clients setting up a private foundation makes the most sense. Whether you’re looking at gifting just small amounts or large amounts to charity, we have a solution for you. Let me provide you an example. There are many ways you can direct gifting to family or to charity, depending on your goals. For one example, one of my clients had been using a donor advised fund effectively for years, but he was delighted to learn he can now give to charity directly from his IRA with no taxation. He was especially happy because by gifting from his IRA at age 72, he learned that the required minimum distribution that would’ve otherwise been adding to his tax burden and potentially increasing his Medicare premiums would now be held at bay.

Tamara: The final step in building your unshakeable retirement plan is to also build an estate plan. At death, all assets change hands and move. We spend our whole lives building our estate, accumulating assets, focusing on returns, on income, taxes. But what about the desires for what happens next? This is the reason why we have a whole legal team to help our clients evaluate whether setting up a will or a trust and setting up appropriate documents to ensure that our client’s desires are met in case of incapacity or upon passing and having healthcare power of attorney, as well as financial power of attorney. Those are some of the key documents that most families would have. And as you become our client, we will review those and make sure that they are appropriate given where you are in life today. And we will help you amend those as you move through life and your decisions potentially change.

Some of you may have accumulated very significant amount of wealth. And we all know that in this country, there is what we call an estate tax or inheritance tax. For 2022 estate tax exemption is 12,060,000 per person. So if your estate and your net worth exceeds that amount, or is approaching that amount, another big concern may be an estate tax, which is currently at 40%. That really means that growing your wealth in the future really means that IRS becomes your partner. They would own 40% of every dollar that you make. There are strategies that could be put in place now to help you minimize that impact as you transfer the wealth to your family in the future. Also estate tax exemption is set to change at the beginning of 2026, and those limits to go down. Consider meeting with the state planning attorney to discuss your specific situation and how preparing for this potential event can help you maximize the wealth that you can pass on to your heirs.

As we hear today, there are many steps one needs to take to build an unshakeable plan. We have to consider where you are in life, where you would like to go and help you through those different phases with various considerations on taxes, estate planning, income, market volatility, inflation, all of that is coming at us.

Carlos: So let’s talk about why Creative Planning. Whether you’re in the accumulation phase, getting ready to retire, or perhaps you’re already retired and ready to take those distributions from your portfolio. We’ll build a customized solution for you. We’ll work with the expertise of our in-house teams, whether it’s our attorneys, CPAs, or our certified financial planner professionals, to build something that is unique and important to help deliver on those goals and objectives that you have. We’re a fiduciary and a fee based planning firm. And we’re here to look out for your best interest.

Tamara: At Creative Planning our goal is to provide you with the confidence of knowing you have built an unshakeable plan in this time of uncertainty we face every day. Isn’t it good to know that you have a team of experienced professionals in your corner. Thank you for joining us today. Please contact us to schedule confidential, no obligation meeting.

Carlos: We look forward to getting to know you.