With the stock market near an all-time high, interest rates near all-time lows, and potential rises in taxes of various forms, now is the time for high earners to consider the impact of these economic factors on their cash flow, assets, liabilities, and the bottom line. And while specific tax codes and proposals are relevant now, it is likely (and even expected) that the situation will be completely different in one, five, ten, or twenty years from now as new proposals, laws, and policies come to the forefront.
No crystal ball will allow us to see what the future holds, but one thing we can count on is the fact that change will come to the stock market, bond market, real estate market, interest rates, and taxes. This is where financial professionals such as Liang Lee of WestPac Wealth Partners thrive. Liang and other professionals work directly with clients to help craft unique short-term and long-term strategies to fortify their wealth against the ever-shifting impact of laws, markets, income, health, and life events on their financial picture.
Illustrating the importance of planning with a focus on both the present and future, Liang explains, "We often hear about investment rate of return. What's more important is the after-tax rate of return because it determines what goes into your pocket after paying taxes. Many people don't realize that they'll owe taxes on much of their investments many years from now. So, we need to create strategies and investments to protect us from taxes both now and in the distant future."
How do you begin building a financial strategy that helps protect and grow wealth both now and in the future? Here is Liang's advice, gathered and refined through more than twenty-five years of experience in the finance industry.
Tip #1 - Build a Diversified Investment Portfolio
One strategy Liang employs is creating a diversified portfolio of investment and savings vehicles tailored to each client, taking into consideration their current financial situation, challenges, and ultimate goals. "Most people understand that there are pros/cons with almost every investment or financial vehicle, hence the need for diversification," says Liang.
However, building a diversified portfolio isn't as easy as it sounds when there are a million options to sort through, including stocks, bonds, real estate, life insurance with cash value, 401ks, venture capital, and countless others. Here are just a few of the examples and pros/cons that Liang considers when building a diversified investment portfolio:
- Stocks are "high" risk in that they have the potential to grow, but in any one year, they could be down 50% or more and potentially take five years or longer to recover fully.
- Bonds are considered "low" risk and could provide stability, security, and income. Still, one can suffer losses in bonds' principal due to rises in interest rates or failure of the bond issuer to repay the principal.
- Real estate can be an excellent "medium" risk asset for primary home or rental income, though liquidity (ease/speed of selling) could be challenging in some years. It is also vital to analyze the cash flow from real estate rental income - paying attention to the rate of return after expenses such as insurance, property maintenance, property taxes.
- Bank savings insured by the FDIC can provide safety of principal, but such savings usually cannot keep up with potential rises in inflation.
Tip #2 – Enact Both Short Term and Long Term Tax Planning
"When it comes to tax planning, it is also important not to put all your assets in one type of tax play. Some financial vehicles help you with taxes in the short run, while others help you in the long run," Liang explains.
Following are Liang's considerations regarding well-balanced tax planning:
- A traditional 401k, IRA, SEP, or Defined Benefit Plan can provide tax deductions in the current year. It is important to note, though, that if you have most of your retirement assets in these plans, you could end up in a higher tax bracket when you retire than the tax bracket you're in now since all distributions are taxed are retirement and since the governments control tax rates.
- Triple Tax-Exempt Municipal Bonds can pay out interest tax-free nicely, but any principal growth is taxable, and interest rates (at the time of writing) are near historic lows.
- While Roth IRAs and Roth 401k assets are a means to garner tax-free growth by contributing post-tax dollars, contribution limits are somewhat low.
- Whole Life Insurance provides unique tax-free growth, and minimal risk as an asset uncorrelated to the markets, in terms of both cash value and the death benefit. However, it is a commitment that only rewards those with long-term discipline.
- An Irrevocable Trust can offer some asset protection from estate taxes, although typically, you would lose a certain degree of control in such a trust.
- Gifting assets to a loved one is a wonderful gesture; however, you're also gifting them the cost basis; hence they may be faced with capital gain taxes, and you'll also lower your estate tax exemption amount.
Tip #3 – Develop a Holistic Financial Plan (With Help From a Financial Advisor)
So what is one to do, knowing that the future holds untold changes that could significantly impact their finances? Working closely with a financial advisor to develop a holistic plan is essential. Here is Liang's advice:
- Make sure the financial advisor you work with can help you achieve financial balance across your entire financial picture, including these four major domains:
- Cash Flow
- Choose a financial advisor who will work directly with you to help build a cohesive, holistic map of strategies designed to protect your wealth from outside forces. Your financial advisor should focus not only on managing your assets, but also managing/guiding your income and cash flow to help ensure you are a world-class saver.
- Develop an optimal savings/investments plan that details how much of your annual savings and net worth you should put into low, medium, and high-risk assets.
- Plan for debt management decisions, such as which debt to pay down first, which debt to keep and leverage as "cheap financing," how much of your income/assets to use to pay them down, and finding the balance of when to pay down vs. doing something else first. (Remember that debt takes on various forms, including mortgages, business loans, personal loans, credit debt, and student loans, to name a few.)
- Find the right balance of taxable vs. tax-advantaged assets so that your financial plan will be in a better position to succeed through multiple shifts in your income and tax bracket cycles with various inevitable government tax changes over the years.
- Shift your focus/goal from "retirement" to securing a "work-optional" future so that you can do what you love to do, rather than working only for the money.
- Protect what you've earned and what you're going to earn with proper insurance, wills/trusts/Power of Attorneys. Help protect your loved ones with proper estate planning.
- Don't be afraid to meet with your financial advisor (at least) quarterly to hold both him/her and yourself accountable for maintaining the financial plan you've developed together.
As you work with your financial advisor, remember that one size doesn't fit all; the wealth protection and accumulation strategies that work well for others might not fit your situation.
"There are endless combinations of financial vehicles/strategies depending on a client's specific situation, and that's what makes what I do so fulfilling," says Liang. "It's why the investment bankers and wall street executives, who used to be my colleagues, are now with me as clients. They understand the markets as well as I do and can build investment portfolios, but they don't always have the full holistic picture of all the ways that taxes and other outside forces can impact their financial future. When it comes to artists/creatives, physicians, and entrepreneurs, they are the masters of their craft and spend most of their energy on building their business, so they rely on my guidance in visualizing and building/protecting the financial plan towards their financial independence."
By aligning with a financial advisor who sees the big picture and develops custom strategies to help mitigate the impact of ever-changing economic forces, your finances will be better prepared for whatever the future has in store.
About Liang Lee
Liang is a well-respected financial advisor and senior partner at WestPac Wealth Partners. Starting on the trading floor at 17 and graduating with a near-perfect GPA, Liang continued his career at large investment banks structuring/trading billions of dollars of complex securities. Today he works closely with high-net-worth and high-income individuals and is entrusted with planning for many of his former colleagues.
He provides comprehensive planning to his clients, focusing on risk management, investments, and long-term financial security. Liang prides himself on creating a unique financial planning experience for clients rooted in the highest level of honesty and integrity.
This material is intended for general public use. By providing this content, Park Avenue Securities LLC is not undertaking to provide investment advice or a recommendation for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation. All investments contain risk and may lose value. Diversification does not guarantee profit or protect against market loss. A World Class saver is a Person who saves at least 15 to 20% of gross income.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number - 0H50389, AR Insurance License Number - 16202373. | Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. | 2022-132659 Exp. 01/24