Life can be a rollercoaster ride full of ups and downs, and when those downs involve losing money in the stock market, losing a job, getting divorced or even waiting too long to begin saving, it can feel like there is no light at the end of the tunnel. The crushing weight of financial struggle can feel like a heavy burden, and it’s easy to assume that we’ll never be able to bounce back. It’s easy to feel like our dreams and desires for a certain lifestyle are out of reach forever. It’s easy to want to take big risks in an effort to recover quickly.
There are effective strategies that can help you get back on your feet and overcome financial loss. Whether you need to reassess your spending habits, explore new investment opportunities, or seek out professional guidance, there are ways to get back on track. It may not happen overnight, but with persistence and dedication, you can achieve financial stability and even surpass the lifestyle you enjoyed before.
Unsecured riches diminish with time
Taxes, inflation, and increases in consumption can cause significant wealth erosion if not handled strategically. Many high-earning professionals, including physicians, dentists, and business owners, often find themselves stuck in a cycle of earning more money, consuming more, and paying more taxes without making much progress towards building their wealth.
While recovering lost money may not be possible, there are ways to create a financial strategy that uses existing assets to prevent taxes, debt, inflation, and lifestyle creep from eroding wealth-building potential. By implementing effective planning, lost money can be recovered and turned into a positive rate of return. It’s important to remember that every dollar lost has a negative rate of return of 100 percent. But with the right financial planning, individuals can prevent taxes and inflation from draining their wealth and achieve their long-term financial goals.
Three tactics to retain more of your finances
Below are three tactics we apply when working with clients to safeguard their wealth, enhance the performance of their wealth-building tactics over time, and alleviate any apprehension or uncertainty that may cause them to miss out on valuable financial growth prospects.
1. Cultivate expert saving habits
By upping your savings rate to at least 15 percent, you can actually reduce your risk in the market while building serious wealth over time. Plus, you’ll feel more confident and in control along the way. Now, I know what you’re thinking: easier said than done, right? Well, fear not. There are some seriously cool technological tools out there that can revolutionize the way you think about saving. By automating your savings process and prioritizing it above all else, you can start capturing that first dollar of income and watch your savings grow from there.
2. Implement a strategic asset allocation plan
Balancing risk and reward is crucial, but where you invest your money matters just as much. Why? Because taxes. The tax treatment of your investments can greatly affect the growth of your portfolio, especially if you’re a high earner. It all comes down to the time value of money, which states that a dollar today is worth more than a dollar tomorrow. If you’re hit with taxes on your investments, you lose the opportunity to invest those dollars and let them grow over time.
So, what can you do to be tax-efficient in your investing? Pay attention to the tax structure of the assets you’re investing in. Some investments are taxed differently than others, so it’s important to do your research and choose investments that align with your financial goals and tax situation.
While compound interest is often hailed as a powerful financial tool, it may not be as miraculous when taxes come into play. In fact, in a taxable environment, the benefits of compound interest can be significantly diminished. The subsequent points serve to explain this concept:
- First, you could go for a tax-exempt account, such as a Roth IRA, Roth 401(k), or Roth 403(b). The catch? You’ll have to pay taxes upfront on all your contributions. But the silver lining is that your money will grow income-tax-free and come out income-tax-free in the future. However, be mindful of the contribution limits so that you don’t put all your eggs in one basket.
- Second, you could opt for a taxable account, like a traditional brokerage account. This account will subject you to taxes along the way, such as interest or dividends, or capital gains when you sell a profitable investment. You’ll have to use another account to pay those taxes, and that means losing out on the potential earnings that money could have generated for you.
- Or you could go for a tax-deferred account, such as a traditional 401(k), 403(b), or IRA. With this account, you’ll get a tax deduction today, and you won’t pay any taxes until you withdraw the money. The downside? When you eventually withdraw, you’ll have to pay taxes on the amount based on the ordinary income tax rate at that time.
Let’s say you have $100,000 to invest, a 25-year investment horizon, a 40% tax rate, and an expected 5% interest rate. If you’re wondering how the different types of taxation will affect your investment, we’ve got the answers. At first glance, all three accounts may seem to have the same balance after 25 years. However, the differences in taxation are significant. The tax-exempt account has no taxation, whereas the tax-deferred account has a whopping $94,545 tax liability that must eventually be paid.
But that’s not all - the taxable account had to pay taxes every year, resulting in a lost opportunity to earn a 5% rate of return on the taxes paid over 25 years. When you add up the taxes paid and the money lost at 5%, the total comes to over $169,000.
It’s clear that choosing the right type of taxation can make a significant impact on your investment’s long-term success. So, take the time to carefully consider your options and make an informed decision. Seek advice from your financial advisor regarding the tax implications of your investment choices as making a single mistake can have a substantial impact on your net worth in the long run.
3. Explore the potential benefits of permanent life insurance
Did you know that life insurance can also be a tool for accumulating wealth? Permanent life insurance, in particular, can serve as a valuable asset in your portfolio. Unlike Roth IRAs or Roth 401(k) plans, there are no income limits on how much you can contribute, making it an attractive option for those in a high-income tax bracket.
When it comes to life insurance, there’s more to it than meets the eye. There are a ton of different options and strategies out there, each with their own unique benefits and drawbacks. The following are just a few of them:
- The money you put into a life insurance policy goes in after-tax, but it grows tax-free. And when you use it properly, it comes out income-tax-free too! That means you can enjoy the fruits of your labor without Uncle Sam taking a bite out of your retirement savings.
- Unlike taxable accounts, there’s no need to worry about losing wealth due to Time Value of Money (TVOM) costs. These hidden fees can add up quickly over time, eating away at your savings. But with a life insurance policy, you don’t have to worry about TVOM costs, allowing you to keep more of your money in the long run.
- Depending on where you live, the cash value in a life insurance policy may be protected from creditors. That means if you’re ever faced with financial difficulties, you’ll have peace of mind knowing that your policy’s cash value is safe from creditors’ reach.
- The cash value in your policy acts as a buffer asset during times of high market volatility. This means you don’t have to draw down your other assets in a down market, allowing you to weather the storm and preserve your wealth for the long term.
- The existence of a permanent death benefit in a life insurance policy acts as a “permission slip” in retirement. This means you can spend down your assets without worrying about leaving behind an inheritance. Instead, you can enjoy your retirement years without sacrificing your standard of living.
Gone are the days of relying solely on the “4 percent rule.” By focusing on your complete financial picture, you can protect your hard-earned money while also optimizing your wealth-building potential. And don’t worry if you’ve experienced a loss in the past; it’s never too late to start recovering and securing your financial future.
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