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  • Kevin McCollester

Creating Certainty in Uncertain Times

We are facing unprecedented uncertainty due to the Covid-19 pandemic.  How are you faring?  Are you doing everything you can to protect your health and those of your loved ones?  I hope you are well and managing the stay-at-home, work-from-home orders as best you can and that you will avoid the virus, stay healthy and come out of this mess with a renewed sense of purpose and stronger ties to family and friends. No doubt this is the most serious health threat we have faced in our lifetime and even now we don't fully understand the crisis and how best to deal with it.  We have every hope that we will overcome this disease, but at what cost human and otherwise?   As of this writing, there have been nearly 2 million confirmed cases worldwide resulting in over 100,000 deaths, and the U.S. leads the world in both the total number of cases and deaths.  There have also been over 16 million unemployment claims filed over the last three weeks alone!  Many of those will get their old jobs back, maybe.  But how many?  Congress just passed a sweeping $2.2 trillion stimulus package (CARES Act) to help the newly unemployed and businesses stay afloat.  Will that even be enough?  Who knows.  How long will stay-at-home orders be in force?  How long before schools and businesses and parks and churches are open and people are free to work and shop and play and worship without wearing face masks and standing six feet apart?  When will we be able to shake hands or hug or kiss one another in greeting?  Will life ever be the same?   As a result of the Coronavirus pandemic, the stock market dropped nearly 40% in under 6 weeks and then regained half of that loss over the ensuing 3 weeks.  That is a lot of movement over a short period of time.  What is next?  Is the worst over?  Is the worst yet to come?  It's anybody's guess.  No one knows.    The US National Debt now stands at over $24 trillion, that's over $73,000 for every US citizen (you can follow along in real time at ).  The annual budget deficit (the amount we are spending more than we collect in taxes) is around $2 trillion.  How will we ever get that under control or are we past the "point of no return"?  Many experts believe that the only hope we have for containing this mess while meeting our obligations is to dramatically raise tax rates or significantly cut benefits (i.e. Social Security and Medicare) or some combination of both.  What will Congress do?  They must do something, right?  We do know that if Congress does nothing, the 2017 tax cuts will expire and taxes will actually rise in 2027.  What are the chances that there will be no tax law change until then?  How long will taxes will remain historically low when so many forces are at work to necessitate raising them?  The question isn't really WILL taxes rise, but WHEN and by HOW MUCH?  So let's talk about finances.  Are you 100% certain you will have sufficient financial resources for retirement, or do you have some doubt?  When you look at your 401(k) and IRA balances, how much of that money is actually yours?  Can you tell me with any degree of certainty how much of your 401(k) and IRA account balances you will actually be able to spend when you retire and how much of it you will have to pay Uncle Sam in taxes?  You would have to be able to predict with absolute certainty the rate of return you will get and what the tax rates will be when you take the money out.  You cannot tell me either one, so how do you know you are doing enough and doing enough of the right things to have enough money saved for retirement that will last as long as you are going to live?   Do you know how long you're going to live? I recognize that we have always lived with uncertainty and that given enough time, the stock market produces outsized returns and that our investments must be understood in the context of "the long haul".  That's what we are taught to believe, and that it's really the "only game in town" when it comes to retirement savings.  But what are the risks associated with doing that?  Do you understand the risks?  Here are a few of them to consider. 1. Stock market volatility - In the last 12 years, we have had two crashes of over 40% and one very long bull market.  What will the next 12 years hold?  More of the same?  When do you hope to retire?  Will it be right at the time of the next market crash?  How might that derail your plans? 2.  Higher taxes - Taxes are historically low with the top marginal tax bracket being 37%.  What happens when you get a tax break of 37% on your 401(k) / IRA contributions today but have to pay 50% or more when you take that money out?  Is that a good move? 3.  Liquidity risk - What is the risk to having your money tied up in retirement accounts that restrict your ability to access the money until you are 59 1/2 except under certain circumstances?  What if you need the money before then?  What will that cost you in lost return and delayed retirement? 4.  Longevity risk - What is the risk that you will outlive your retirement savings?  How do you protect against this when you have no idea how long or how much money you will need without becoming a burden to your heirs or society?  At what rate can you safely draw down your assets and still maintain sufficient reserves to last as long as you do?  How much of that will you need to keep "at risk" in the stock market in order for the necessary rates of return to happen?  What happens when the stock market crashes in the middle of your retirement years?  And likely more than once? What can you do to bring more clarity and certainty to your financial situation?  Is there anything you can do?  Here are a few ideas. 1.  Portfolio diversification - If all of the money you are setting aside for the future and/or retirement is in the stock market (stocks, mutual funds, ETFs etc.), consider non-stock market correlated assets such as real estate, precious metals, and Life Insurance.   2. Tax diversification - Because there is so much uncertainty around future tax rates, having money in accounts that will never again be taxed is a wise diversification tactic.  If all of your money is in tax-deferred accounts, then you are setup for taxes potentially to take much of that money away from you.  Examples of never taxed again accounts are Health Savings Accounts, Roth IRA, Roth 401(k), and Life Insurance (however see risk #1 above). 3.  Stay liquid - Liquidity isn't just a matter of how quickly you can access cash when you need it, you need to consider the cost associated with that access.  Stocks are liquid, but if they are in a 401(k) account, you may be able to raise cash by selling, but you might not be able to access that cash very easily or without penalty.  Equity in your home is not necessarily very liquid if it means you have to refinance or take out a home equity line of credit to access it.  Find places to keep a reserve of money that you can access at any time for any reason with as little or no cost to you, such as bank accounts and Life Insurance. 4.  Create cash flow - Typical financial advice says to save as much as you can in order to not outlive your money ... hopefully.  There are too many variables to make that a safe bet, such as, what rate of return will you earn?, how will market volatility impact that return?, will health concerns dramatically increase your need?, how long will you live?, to name a few.  Find ways to have cash flow that is not dependent upon stock market rates of return and that will last as long as you do, such as real estate and annuities.  You should also consider augmenting your 401(k) / IRA withdrawal strategies with loans / withdrawals from cash value Life Insurance so that you are not forced to withdraw beyond what is required (RMD) in down market years allowing more of your investments time to recover.   5.  Get out of debt -  Just like the Federal Government, most Americans have a debt problem.  Debt problems negatively impact our lifestyle by requiring us to use a portion of our income to service that debt through periodic principal and interest payments.  Debt also negatively impacts our health and emotional wellbeing.  Getting out of debt frees up income and other resources allowing us to live life more freely and take advantage of opportunities as they come our way, whether those be investments, travel, or service.  The most common get out of debt program is the "debt snowball" where basically you force yourself to control spending and apply debt servicing payments consecutively to each loan adding the previous loan's payment to the next payment as each loan gets paid off, thereby creating a "snowball effect" of ever increasing payments until the debt is finally paid.  Many don't have the discipline or the desire to "starve" the debt monster in order to tame it.  This is why it is so hard to get out of debt, but so freeing once done.   At Real Family Wealth, we believe in helping people create more certainty with their financial future.  We can't eliminate all risk, no one can, but the more certainty you can create, the better able you and your family will be to weather the financial storms and curveballs that life throws at us.  We believe that helping individuals and families get free from debt is one of the best ways to start.  Eliminating debt increases the control that YOU have over your own financial destiny, reduces the stress that so often accompanies financial matters, and allows you to live life to its fullest. At Real Family Wealth, we have a unique debt-elimination approach that takes the traditional "snowball" approach and turbo-charges it by creating a financial foundation that not only gets you out of debt, it creates the framework for future financial certainty without so many of the risks associated with typical financial planning (see risks above).   To find out more about this program, join us on Thursday, April 16 at 9PM Eastern for an informative and educational webinar where we will teach you things about money you may have never understood before and where we will provide a real life example of our debt elimination program in action. Click on the link below to register now! REGISTER NOW!

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