Capitalist Investor

Managing and Staying Ahead of Risk, Ep. 250

• Strategic Wealth Partners

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Join Derek, Tony, and guest Dave in this episode of The Capitalist Investor as they discuss ways to stay ahead of financial risks like tax increases, inflation, and market volatility. Discover the importance of proactive financial planning to navigate uncertain economic climates and ensure a secure financial future. Learn how to optimize your portfolio, consider Roth conversions, and prepare for potential challenges ahead. Stay informed, stay prepared - listen now!

Hello, and welcome to this week's episode of the Capitalist Investor. As always, you have me, diamond hands D, and Tony the tiger. Yeah, baby. And this week, standing in for Luke, we have Dave Abate back. Great to be back, boys. Yeah. No nickname yet, man. You gotta still. You gotta still earn your stripes. It's been a while, though, since you've been on, so welcome back, Dave. Thank you. We had our, we had our barbecue and people like, when's Dave coming back? People were calling for it. Yeah. We got to give people what they want. All right, well, this week, we'll kick off with the planning corner, and I think a pretty, pretty good topic to talk about, honestly, is kind of a summary of a lot of things that we've been saying through the weeks and to lead up to the summer, but ways to stay ahead of risk. So when we're putting together a financial plan, the last thing we want to do is just assume everything's going to be perfect forever. We want to make sure that we can stress test that and we can get ahead of a lot of the risks that are out there. I'd say probably one of the first risks we can talk about is, and we've been talking about it a lot, taxes going up, whether it's very shortly or sometime during retirement. Yeah, it's definitely a risk. It's going to most likely happen again if Biden wins. Definitely going up. He's already talking about what he's going to do, and we've had a show or two on that already. And then Trump stays in. I'm sure he's anti raising taxes kind of guy, so we'll see what happens. But he does have a huge headwind ahead of him with all this debt that we have. So does it make sense to do Roth conversions, question mark. Yeah. And I think to set the table if things happen without any interruption. Right. The current tax rates are supposed to sunset at the end of 2025, and what that really means is the marginal rates on average go up about 20%, 15, 20%, 1520, 5%, depending on which bracket you're looking at. So as you guys are kind of laying out, does it make sense to make moves in advance of that known change? And it all comes down to, like, tax arbitrage. Right? Does it make sense in your situation? Yeah, you know, a lot of conversations I've been having is like, hey, I'm, you know, 73 is the new RMD age. Right. And as my account continues to grow and I'm forced to take out starting at somewhere around 3.65%. I don't need all that money, and I'm being forced to take it out and pay taxes on it. So you either got to pay it then or you pay it now. So if you can come to those. If you can come to that realization, maybe paying it now makes a lot of sense just because of all the headwinds that are out there. Exactly. And it's like that, we look at the country and the deficits that we run. Right. Taxes probably aren't going down anytime soon. No. So the guess is that they're going to accelerate and to take some of that risk off the table, that unknown of where they actually land. Right. Take your medicine now and then know that you've paid the bill, and when it comes out on the back end in the future, it's going to come out tax free to either you or your beneficiaries. Yeah. Moving on to, like, inflation. So before I leave, taxes, don't run out and do roth conversions. Talk to your advisor first. Make sure it makes sense, because then it's a coordinated effort with your CPA to find out, you know, does it make sense, based on your income situation, to do it because you might be working? Does it make sense to do it then? Should you wait till you retire? Are you, are you retired and you have room to do it? So again, just don't run out and do roth conversions because we told you that it might be a good idea because I'm going to use the word might. Everyone's a little bit different. Inflation, increased retirement income. So as things go up around us, and we'll have a future show here in a couple days about retirees possibly going back to work because of increased inflation. But, yeah, it's a real thing. We used to build plans at 3% when inflation was one, and 2% now that inflation's four, we still build them at three because it should normalize. Building a plan for 4% and projecting it out 35 years might be a little bit aggressive. So, you know, keeping it around 3% on a. On a long term basis makes a lot of sense. But with that being said, sometimes there are other things in your life that go up more than 3%. Energy, food, shelter, things like that. And some of those items are not necessarily calculated or put into the calculation for CPI, which they increase Social Security. As other things go up around for employers, does that leave room for them to increase wages? So big headwind, but it's also a very big unknown. You don't know where inflation is going. You don't know what could spike it. You never know what could make it go up. Don't know what can make it go down. You know, I mean, I can make huge assumptions like, hey, if inflation goes down, probably the economy's in a bad position. Inflation's going up. Well, there could be a lot of things. Geopolitical issues, printing money from the government, government subsidies, you know, there's, cutting the fed rate is a, is a form of stimulus which is then thus a form of inflation. So you guys want to, you guys got any takes on those? Yeah, you know, I would say, and something that we haven't already mentioned here in the last couple of weeks, and I kind of mentioned it at the top of the show, the real reason to do a financial plan isn't just to do it one time. You know, it's meant to be updated through time and it's also meant to run multiple scenarios. Right. That, that's really, ultimately what we get to is a Monte Carlo score. And all that score is, it's just 1000 trials of a statistical calculation. So it's not giving us just the right answer every time. It's giving us a range of outcome and trying to get your outcome in that positive range. So Tony mentioned if you take inflation from three to 4%, it's going to jack up your expenses really high towards the end of that plant, especially if you're 55, 60 in that frame. So that's why you do multiple attempts or multiple runs of a scenario to show you, hey, well, if inflation does increase this way and it's elevated for five years and now we're going to average 4%, what happens to our plan? It's not meant to be the end all, be all. It's meant to give you peace of mind knowing that if inflation does increase, then your plan would be okay. Understanding that it's not just one answer that you're going to get. Planning is a process. So understanding the risks out there and running them through the plan is going to give you peace of mind to know that you're prepared for those roadblocks ahead. Derek, that's a great point. Our clients are already ahead of the game because what we see is most people, when they start out as prospects, the ones that have been ambitious enough to run that yellow pad financial plan, they're looking at that first year of expenses and they're looking at that first year of income and they're extrapolating those numbers into the future, into perpetuity. And really inflation is a silent killer in the whole process. Unless you model that out exponentially, you really aren't getting a true picture of what retirement is going to look like going through that process. Our clients have seen this before, but going through that process is really going to help you have confidence in transitioning from your working years to retirement. Yeah. Inflation, the invisible force inside your financial plan. Some people just forget to add it. And then the last thing managing and staying ahead of risk is market. The market volatility, things like that. So we'll always say it, proper diversification is always a must. So, you know, annual rebalancing, as the market goes up or down, rebalancing your portfolio on an annual basis just equalizes your risk in both directions. Annual risk assessment. As some people get older, they get a little bit more scared of the market. So that's okay. But with lower risk, we need to understand that there's lower returns. I met with somebody yesterday, and I always say this. I've built hundreds and hundreds and hundreds of financial plans, and I can never look at somebody's balance sheet and say, yeah, you're good. You know, I'm not, I'm not a financial planning tool. You know, like, I, I've seen people, I'm like, man, this plan should be awesome. And it's not, or vice versa. I'm like, I don't, you know, like, I don't even need to build a plan. This thing's gonna bust up and break up and then it passes again. I can get a good indication, but I'm not a planning software. And I met with somebody yesterday, and they have a bunch of money in cash and cds, scared of the market, don't want anything to do with it. Luckily for them, they, they know that, you know, I know that they have a lot of guaranteed income sources, pensions, Social Security, a couple annuities, things like that, but they don't know what they spend. Right. And at that point, it's like, well, we need to, we need. That's the biggest number in the whole financial planning process. I need to know what you spend, because that's going to dictate if you're going to run out of money or not. And with that person I just mentioned, they're like, well, I'm not susceptible to the market. It seems like an all time high. You know, I can't argue with you there. Yeah, that is a fact. The market's all time high, you know, but you have also a lot of analysts saying, hey, there's five to $6 trillion sitting on the sidelines and cash and cds, just like you. And that's exactly what I said. And there's some analysts out there saying that the market's going to like over 6000. You put a 6000, I mean, we're talking another 20%. Yeah, I've talked to people two or three years ago, I'm like, oh my God, I don't want anything to do with the market. I'm 40%, 50%. And again, if you're going to just do like the interest rate cds, things like that, you now understand that you have risk in that there's interest rate risk. We are probably at a top on an interest rate hikes. They're not going to hike anymore. Most likely if they're going to do anything, they're going to cut. And now those 5% cds are going to be 4% cds and maybe 3% cds. And now do you think, where's inflation going to go when that happens? So again, you know that 5% CD against current inflation rates, your net, your after taxes and inflation, you're actually probably getting 1% after taxes and calculating inflation. So it is a good headline number. But what are you really, how much are you really pushing forward on it? Yeah. And the way that I kind of look at it is the goal. Derek hit on it earlier. Like our process, we're not trying to get a precise number. We don't know how the future is going to play out. Exactly. We're running those thousand trials to figure out what are possible outcomes. Right. So the goal is to build an all weather portfolio. So think about like an all weather vehicle that can go on any terrain. And then when you're doing those annual checkups with your advisor, you may need to change your tires out. Right. We're going to go from winter to summer tires now to help us get better traction. So that's the kind of the analogy, the way that I look at it. And the goal is not to be necessarily like, hey, we're extreme. We're all pedal to the metal. We want to make sure we're going to make it to our destination regardless of the forecast. Well said. I don't have anything else to add in there, so if you guys have any questions, comments, concerns for us here at the show, please hit us up at info connect.com and we'll talk to you next time. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.