As you continue to rummage through income tax receipts and other miscellaneous forms, don’t you wish you could make this process more productive? Throughout the calendar year we accumulate tax receipts into piles or folders. So now the task begins to organize last year’s income and expense history. Could you add a new dimension to tax filing that would make this activity more enjoyable as well as financially profitable?
I propose that sometime in the first quarter of every year, you adopt a “5-day Financial Self-Care” program. This take-care-of-me program gives you permission to carve out 5 days (40 hours) to take the time to review your family’s goals and progress to date.
Income tax preparation and organizing is just one of the pieces in financial self-care. Rather than just hunt and gather “stuff” for tax preparation, why not elevate this process and revisit your purpose in the “why” you do what you do?
Let’s start with an obvious theme for your inaugural self-care regime: retirement planning. What is your strategic financial purpose to be achieved? Once you and your wealth manager quantify that specific financial goal, you may want to adopt “tunnel vision.” In other words, that goal, that end-result, will now drive every decision you make from this point on. It is the benchmark that every other decision is weighed against. So let’s couple retirement planning with the necessity to accumulate more capital, and let’s ponder some issues.
Financial success is a journey toward a worthwhile predetermined goal. With that mindset, you begin to see each component of the wealth management process with a different perspective. You may begin to see your tax bracket as a tool to leverage the accumulation of more wealth. If Uncle Sam and your resident state tax put you into the 30 percent marginal income tax bracket, can your marginal income tax bracket provide you any leverage to accumulating more wealth? In a simplistic observation, a 401(k) contribution can generate a 30 percent reduction of income taxes on the amount contributed to a 401(k). So if you contribute $12,000 to a 401(k), you will owe $3,600 less in income taxes because your reportable income is $12,000 less for that calendar year. Another way of looking at it is that the taxing authorities are contributing 30 percent of your contribution. Those contributions are pre-tax, and your deposits and earnings compound on a tax-deferred basis.
So are you maximizing the benefit of your employer-sponsored retirement plans? If not, why not? Are other expenses competing for your quest for self-care?
There are times when the discussion about taxes may appear to be counter-intuitive. Another pitfall to accumulating wealth is to Roth or not to Roth? Why convert your traditional IRA to a Roth IRA? It’s expensive to convert. How much do you have to make up in future gain to reimburse yourself for the taxes paid on the conversion? If accumulation is the goal, then paying the conversion taxes may at best be “taking a step back to take two steps forward.” Predicting the future tax system is akin to predicting the weather.
Remember financial planning is part art and part science. Successful retirement planning requires soul-searching and dogged-determination to your chosen path. Your passion for that objective keeps both the advisor and you on that path to achieve a positive outcome. Temptations are bound to distract you from clearly seeing your outcome. My role as your confidante and wealth management coach is to continue to remind, clarify and quantify that specific target. Not only do we collaborate with you on long-term strategies, we also identify those events that could potentially sidetrack you from the big picture. What past behaviors and habits need to be altered to create this new outcome, rather than repeating habits that failed in the past?
What passion do you want to manifest? What is your vision that requires our collective energy? I ask you to describe with clarity and detail that picture in your mind and heart. That becomes the aim and purpose for your family.
You may comment that you cannot afford to maximize your retirement contributions because you have other bills to pay. What if your mortgage lender has convinced you to accelerate your mortgage payment or refinance and reduce the term-loan on your mortgage from 30 to 15 years or less? How does that get you to your financial retirement nest egg? Will a paid up home make your retirement financial objectives a reality? After all, your parents always told you to pay off your mortgage.
What if your retirement financial objectives fall short because you invested your extra cash into an illiquid investment — your home? And how does your home provide you income in retirement, without resorting to a reverse mortgage in your retirement years?
Therein lies my argument. Most decisions to pay off the mortgage, buy a car for the children, or be self-indulgent create reductions in 401(k) contributions and other retirement accounts. Paying off your mortgage, buying your child a car and being self-indulgent are good ideas, however, relative to your goal to accumulate wealth for retirement, how do those choices fit in to your true overall strategic purpose? What’s the long-term implication of a decision made in a vacuum today?
Join Dan Cunningham and me on our next SBN webinar on Wednesday March 28 at 1 pm EST. We’ll discuss How Strategic Finance Helps Grow Your Business and Your Personal Net Worth.
Robert A. Valente, CFP®, AEP®, is CEO and Managing Member of RAV Financial Services LLC. He can be reached at firstname.lastname@example.org.