It’s tempting to celebrate when your tax bill drops to zero—but is that always the smartest move? In this month’s video, Michael Brady explores why focusing exclusively on tax minimization could limit your long-term wealth and how strategic tax planning can set you up for a stronger financial future. From managing your tax brackets to considering Roth conversions, Mike shares the big-picture mindset that keeps you wealthier over your lifetime.
Read on, watch the video, and explore related case studies that show these strategies in action.
Transcript
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full service financial services firm headquartered here in Boulder, Colorado. Although I am recording this from my place up in Wyoming, I spend the summer up in Wyoming, and it’s just a wonderful place for me to do a lot of business thinking and strategy. What are my convictions? What’s most important? Sometimes it’s good to get out of the day-to-day. Although I have to say this summer, thanks to wonderful clients like you, my friends, and my network, I’ve really met with a lot of people. I’ve had more meetings than normal this particular summer. But that’s okay. There are worse things, that’s for sure. I really enjoy staying busy, and I love my business. I like what I do. I never want to stop doing this, and hopefully you’ll always be my client.
So today I want to talk about taxes. There’s a philosophy: tax minimization or wealth maximization. Tax minimization means you do everything you can to get your taxes as low as possible, celebrating when they’re down to zero. I’m in the wealth maximization business. That means we want to make an individual, a couple, or a family as wealthy as possible. Sometimes that means paying more taxes. What would you rather have? Would you rather have $10 million in income this year and pay $2 or $3 million in taxes—which is a lot of taxes—or would you rather have $10,000 in income and pay a couple thousand bucks in taxes? Let’s keep the big picture in mind. The prize is that you become wealthier. If you double your income, your taxes are probably going to double. You could minimize your taxes by losing lots of money—a big tax loss—but that’s no good. Nobody likes that. So let’s keep our eye on the prize.
When I ask people, “Do you think taxes are going to be lower, the same, or higher in the future?” I have to tell you, nobody ever says they’ll be lower. Almost always, people say it’s going to be higher or at least the same. Then I ask, “What’s your standard of living when you retire? Do you want it to be lower or higher than it is now?” Everyone says they want it to be the same. Nobody ever chooses a lower standard of living. My experience has been that people think they’re going to spend a lot less in retirement, but that’s not true. You’re not buying suits or paying gas for commuting, but the same money gets redirected to visiting grandchildren, going on cruises, or healthcare expenses. So your expenses are not necessarily going to go down in retirement.
If we can agree that in the future taxes are going to be equal or higher, and your income needs and lifestyle might be very similar, the question is: when do we pay the taxes? We’ve got certain choices. Do we try to minimize our taxes to zero now, or do we try to pay taxes at the lowest average rate through our lifetime? One approach I take with clients is to say, “Maybe you’ve got some space within your tax bracket—10, 12, 22, 24, etc. Instead of working to get it all the way down, sometimes it’s good to say, wow, I have a lot of space in the bracket I’m in. Should I convert some money now and pay the taxes, like maybe over to a Roth, so that I don’t have more taxes on my IRA or 401k in the future when I’ll still need the money but might be in a higher tax bracket?”
We’ve got our income and our deductions. You pay taxes on the difference. If your deductions are equal to or higher than your income, you could convert IRAs all the way up tax-free. Money that would have been tax-deductible in the future becomes tax-free. We look at these things to see if there’s something you could do to minimally increase your taxes now but have a huge benefit in the future by converting to tax-free money upon retirement.
When I work with clients, I’m not a tax professional. I don’t have those letters after my name, I’m not a CPA, and I don’t have tax preparer errors and omissions insurance. I want to brainstorm with you and work with your CPA to find out—maybe as an outsider—what we can do to minimize your taxes because it’s your single biggest expense. At the same time, how do we increase your wealth over your lifetime by maybe paying a little bit of taxes now for a huge benefit in the future? At least that’s the question we want to ask so we don’t overlook it.
It’s good to know if your tax professional is a tax preparer who just takes your stuff and prepares your forms, really just a historian putting boxes in the right places, or if they’re a tax planner who gives you proactive advice. Do they meet with you during the year, maybe in the spring and fall, to decide what can be done to maximize deductions? The more deductions you have in a year, that’s great. I hope I’m not giving the impression that tax minimization is a bad thing. The question is, it shouldn’t be the only thing, the only focus. We should try to minimize our taxes, because once again, it’s the single biggest expense we have. But we also want to keep an eye on whether we should defer some of that benefit of tax minimization to the future because we might be in a lower or higher tax bracket in the future. We might want to have tax-free money, not taxable, in that future scenario. Good tax planners are worth their weight in gold. A good one is invaluable, but you’ve got to know how to work with them. I like to be part of a team.
If you’ve got a CPA you think I should talk with, please send them my way. I love having that conversation. If you have not yet sent me your 2024 taxes, send it my way. I’ll look at it, put it in the computer, look at it through my AI software, and give you some conversation pieces to discuss with your CPA. If you say, “Hey, Mike, let’s get on the phone or a Zoom with my CPA,” you can explain what you see. Tax preparers, especially around tax time, are so busy trying to do the best job they can as quickly as possible, and that doesn’t always give them the opportunity to step back and say, “Huh, what’s the tax planning opportunity here?” That’s where someone like me comes in. As an outsider, I can take the time to give you suggestions to talk with them or to give them directly to your CPA.
I love talking taxes with people. I’ve been a financial advisor for 34 years. There are few things I haven’t seen before. The best wealth maximization I can do for you means the happier you are, and then you’re bringing more people to me because you’re saying great things about me, which I would love. There’s more money left in your kitty that we can manage and that you can keep, which reduces your anxiety—and of course reduces my anxiety as well.
Mike Brady, Generosity Wealth Management. I am part of the Generosity Group, which includes Generosity Wealth Management, the wealth management part, Generosity Estate Planning, a full-service estate planning firm run by a licensed attorney, and Generosity Business Exit Planning, which is the business consulting side working with business owners who might want to transition or sell their business in the next three to five years. We help maximize the value of their business. We work and consult with them—through my business partner, Betsy—to figure out, if you’re a business owner, what do you need this to sell for to support your lifestyle, your legacy, and your retirement. If you know someone like that or if you own a business, send them my way. I love these conversations. It’s my passion. One of my niches is working with business owners who are ready to transition or want to get their business transition-ready so they get the maximum value for their legacy when they’re ready on their schedule.
Mike Brady, Generosity Wealth Management. I’d love to hear from you if you have any questions or concerns. Have a great rest of the summer. Bye-bye now.
I’m a big believer that knowing your time horizon for investments is very important. Unfortunately, many investors, and definitely the media, live in the short term when in fact your needs are middle to long term.
I read this interesting blog (link below) that really sums things up. The only important thing is the probability of reaching your goals over the time frame specific to you.
A time frame super long (over 100 years) like some stock market charts is really irrelevant, as is a super short time frame, except to the degree it forces us off our personalized investment plan.
Anyway, interested article about time lengths and investing.
2014 is now over, and a new year is in front of us.
In my video (click on the image below), I briefly do a recap on 2014, and then lay out my arguments for a long term approach, diversification, and reasons why I think being fully invested is wise, particularly as I continue to be optimistic for the foreseeable future.
Click on the video below for 10 minutes of my thoughts.
Hi there! Mike Brady with Generosity Wealth Management: a comprehensive, full-service, wealth management firm headquartered right here in Boulder, Colorado.
Today want to talk about the 2014 review and the 2015 preview- spending most of the time, I think, on the preview.
2014 was a year that was not super high or super low- it was kind of right there in between. The large company unmanaged stock market indexes were in the low double digits-positive for this year. If there was a smaller company investment it was, in general, the single digits- on the low side- kind of low single digits.
Bonds, which I believe are essential for most portfolios-in 2014 they had the low to mid single digits. I’m going to use my hands here: I think a good portfolio of stocks and bonds kind of mesh together with some cash reserves- sort of those core holdings. One thing the bonds did this year [2014] they helped to reduce some of the volatility. If you are 100% stock market index, you’re really kind of all over the place. And in 2014 there was a 7% decline in the in the S&P throughout the year. It did, in the fourth-quarter, recover from that which is wonderful- so it is positive for the year.
I’m going to put a chart up on the screen of the S&P 500 going back to 1997. What you’re going to see is there is some huge advances; some declines; advances; declines, etc. I’m going to just put a circle where we are right now. You can see here, and I put a tiny little arrow next to it, where we have that 7% decline in 2014.
I’m going to put another chart up on the screen. Now you’re going to see what it looks like going all the way back hundred and fourteen years- back in 1900. You’re going to see there are some times of great advance- and it can happen over decades. There are times of consolidation over decades as well. You’re going to see over on the right side where we are now. So the question of ask yourself are we at a consolidated period? Are we at a time of great advance? Of course there could be a decline as well over many times. So this is the environment that we have to make this decision in.
It is normal for there to be dips throughout the year. As a matter-of-fact, going back to 1900, it’s normal for there to be about three dips of at least 5%- historically, that’s what happened. It’s normal for there to be a decline of at least 10% throughout the year when we look at the numbers going all the way back for a hundred and fourteen years. OK?
Time is one of our best advantages. My advice that I give to someone who needs money in a year or two is completely different than the advice that I give when we’re planning out five years, ten years, twenty or thirty. If you’re in your 60s or 70s, hopefully you’re going to live a long life. You still have a long time horizon, hopefully, of ten or twenty years. So the more that we can keep our eyes on what the goal is; Today is point A. Point B is in the future, to keep track of what our goals are in the future the happier we will probably be.
I’m going to put a chart up on the screen. It shows, in numbers, what I just talked about. This is sixty-three years. All the way back to the 1950 of one hundred percent stocks; one hundred percent bonds, and kind of a mishmash of the two. In each one of those groupings that goes from- on the left hand side- one year and on the right-hand side- 20 year rolling time period. You’re going to see that in each one of those groupings, there are three bars and the far right hand bar is a mash of stocks and bonds. The longer out we go, the longer our time horizon has been, the range of returns- the highs have gotten lower and the lows have gotten higher. So that there is a more comfortable range I would say. Kind of gets rid of the outliers of the top outliers on the bottom. And so time is, without question, a great advantage that we have going forward. And so I constantly remind clients of- “where are we going to?” and “What’s our goal?”, “What’s our endgame?” And so, how does one quarter, one year, really fit into the bigger picture of a decade, two decades etc.?
Before we start talking about the preview, let me just tell you that I am optimistic going forward. I do believe that we’re in the beginning of one of those nice big upward swings- that could be multiple years, multiple decades. That doesn’t mean it’s going to be perfect and it doesn’t mean it will be an absolute straight line but I am optimistic about that.
I wanted to read something that Warren Buffett said (one of the best investors in history) and I really have a lot of respect for him. It is this quote right here that he said in the fall of 2008. Just to refresh your memory, the fall of 2008 was horrible! And it continued into January and February of 2009. It was hard to find people who were optimistic at that point in time. What he said is this, “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month- or year- from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before sentiment or the economy turns up. So, if you wait for the robins, spring will be over.”
What’s really interesting is after he said that the market continued to go down another 20 or 30%. And he continued to make investments all the way down. And one of the best investments that he made was actually five months after the market completely bottomed out in March of 2009. But he was committed to his conviction that long-term investments in a portfolio, and he has a well balanced portfolio, was in his best interest and when I meeting with clients we talk about how that might be in their best interests as well.
I think that there are lagging and leading indicators. “Lagging” means that the end result. So let’s say that you think the markets go up. Well, we’re not going to know whether or not that’s true or not so we looked at historically. So that’s an indicator, whether it was up or down, after the fact and then it’s too late. I like to focus on some of the leading indicators. And two weeks ago I did a video which I highly recommend that you look at. It came out around December 19, 2014. So go to my webpage look at that blog or look at the archived news newsletters. (www.generositywealth.com) But at that time I talked about some of the leading indicators about why I optimistic as things go forward in adjusting my conversation with clients accordingly.
One of them is the S&P 500 P/E ratio. Right now it’s around 16%. As it creeps up towards 20 that’s going to be a major leading indicator for me as my optimism might go towards more pessimism. I’m also going to look at earnings per share- whether or not that’s going to drop. The 10 year yield on the treasury right now it’s at 2.18 as it gets closer to 3.5, 4.0 or 5.0, I think that is going to be something that will start to give us leading indications of some problems in the future.
Declining investments percentage as a percentage of the GDP and finally, China. You’ll notice that I talk about China primarily as it relates to their economy and the impact on the world. But if you’re looking there’s always a number of reasons not to invest, not to be optimistic. You can always find every year, and 2015 is going to be no different, a reason say, “well it’s different this time!” Well, what about North Korea? What about the Middle East? What about this, what about that? There’s always, and I can sit here and point to some event, that drive the market for a relatively short time. But long-term, the fundamentals of the market win out. And in my opinion the fundamentals are positive at this point. And I’m a believer, like Warren Buffett, that the market, in general, will be higher in the future than it is today. And so we have to create a portfolio that’s individualized for us, to make sure that our behavior allows us to stay invested in that.
Just a couple of other things before I say goodbye here today: I do believe that consumer spending growth will be good going forward- particularly with lower oil prices. I think that is going to be a very positive thing. And is core inflation going to be affected this next year or two? The 2% target from the Fed, I don’t think we’re going to get close to that. So I think that interest rates are going to continue to stay low through 2015 or maybe even in 2016. And this is ultimately, I think, a good thing for us. So these are some of my argument about why am optimistic. But, in general, I’m a very optimistic person about the long-term for this and I think that it’s my client’s best interest as well. But please, don’t make any decisions without your talking to your adviser, without talking with me. It’s real important to keep the long-term vision and in your mind. But you also have to define what those goals are. You’ve got to find something that allows you, from a behavior point of view, to stay true to what your core is. That’s my preview and my discussion today!
Always I love to hear from you!
Mike Brady, Generosity Wealth Management, 303-747-6455.
And you have a wonderful day! Give me a call at anytime.
I did financial plans for people decades ago, and usually, those that did reach their goals did so not because they bought mutual fund A instead of mutual fund B, or this investment over another, it had to do with having the right behavior and keeping the big questions in mind.
Ben Carlson wrote an absolutely wonderful blog that I’ve linked to below. He says very succinctly what I say all the time, and truly believe.
Here’s his list of 7 Simple Things Most Investors Don’t Do
Look at everything from an overall portfolio perspective
Understand the importance of asset allocation
Calculate investment performance
Save more every year
Focus only on what you control
Delay gratification
These are absolutely right on, and reflect my thinking.
60% of the time a family’s money is exhausted by the children of the person who created the wealth, and in 90% of the cases it’s gone by the time the grandchildren die.
The biggest reason they’re squandered is because the people who bilt the wealth do not pass along clear instructions on how to handle the money after they’re gone. Preserving a fortune requires communication and collaboration that’s hard to achieve.
Have you thought about how you’ll maintain your hard earned money in the family after your passing?
Do you know your life expectancy? What does life expectancy really mean, and why should we care?
These are the questions I answer in my video this newsletter.
Therefore, you should watch my video.
Hi there, Mike Brady with Generosity Wealth Management, a comprehensive, full service, wealth management firm headquartered here in Boulder, Colorado. Today I want to talk about life expectancy and withdrawals and Medicare and Social Security, etc. To be honest with you I only have three or four minutes so I’m only going to give you a little teaser and then I’m going to follow up in the next video.
The first one is life expectancy. If you are 65; I’m going to put up on the chart there, on the video, a chart. What you’ll see if you are 65 years old and you are a woman you have an 85% probability of living up to age 75. That’s a high probability of course. If a couple that are 65 years old the probability of one of you living past 75 is almost assured at 97%. We go out to 80, 85, 90. Let’s just look at 90 years old; if you’re 60 years old, from 75, 85, that’s 25 years to age 90. If you are a woman you have a 1 in 3 chance of living to 90. Periodically I’ll meet with someone who will say; well you know my mother and father they died in their early 80s and there’s no way I’m going to live to 90. Well, you know what, there’s a 1 in 3 chance that you will. Do you want to be that one and spend all your money in the next 25 years? Probably not; plus, many times our parents, that’s just kind of the way it worked. That generation they were smoking and drinking and all kinds of stuff and now we’re always eating kale and gluten free stuff so chances are we’re probably going to live a little bit longer. That’s what statistics have shown us.
One of the values that a financial advisor brings and I always bring to the relationship with clients is life expectancy, that’s usually; if my life expectancy is 85 or so I’ve got to make sure that I plan for much longer than that because that’s using the average. I think that chart there starts to show it. The reason why I bring that up is in retirement; I’m now going to throw one more chart up there for today and what you’re going to see is extending my age and category. From left to right it adds up to about 100%, some rounding and stuff like that, but the gray is the 10 years leading up to retirement at age 65. Then you hit 65 and then above. What you’re going to see is some housing and other increases as a percentage. Transportation goes down. Medical care of course goes up, etc. What we’re going to see on the bottom there is the average inflation from 1982 to 2013 of those particular categories. You’re going to see the medical care which is a higher percentage has a tendency to increase. You know this; you’ve been paying attention the last five years and I’m stating the obvious. Other things; housing is still almost 3%. The percentage of; the items that seem to go up as a percentage of your income also has some high inflation to it as well. That’s something that we have to keep in consideration. We live longer than what we think we’re going to do and many times things are more expensive than what we think as well.
Gosh, do I have time for one more really cool thing here? Here is the variation in healthcare cost. See that little graph there, the little United States there? What you’re going to see is the annual Medicare cost and in Colorado we’re right in the middle. We’re not on the cheap side like many of the world in blue, we’re between $3750 and $4500 and then $4500 after that entry has to do with those with traditional Medicare and comprehensive Medicare depending on where you live in retirement. We’re going to talk a little bit more at another video of some long-term planning, withdrawal strategies. One of the things that a financial advisor brings to the relationship are all the strategies about the de-accumulation of the portfolio; you’ve got the accumulation stage where you’re trying to save money and 401(k) all this type of stuff and then you hit a point and then it’s the de-accumulation. What’s your strategy? What’s your mix? How can you set things up to limit, to make the probability that you’ll outlive your money as low as possible because that’s of course a bad thing. These are some of the things I’m going to talk about in upcoming videos. Nice to talk to you today, sorry it’s so short but I did want to be short and pippy.
