ADDRESSING INFLATION AND TAXES IN GOALS-BASED WEALTH MANAGEMENT

 

In this installment of OUR PROCESS, a series of whitepapers written to advance the education and understanding of Goals Based Wealth Management, I would like to focus on the twin thieves of taxes and inflation.

TAXES

Taxes are a deterrent to financial security. While this is not a very controversial concept, not everyone fully grasps the depth of the problem. To help put the debilitating effects of taxes into perspective, here is a simple illustration.

 

Q: How much is one penny doubled every day for a month?

A: After 31 days, you would have a staggering $21,474,836!!

 

Q: Now, what if we were to tax the gain every day at only 15%; what would be left?

A: Believe it or not you would be left with only $1,915,683. This means that taxes took away approximately 90% of the pretax amount.

 

Q: And if we did the same exercise, but applied a more realistic 28% tax rate, what would be left?

A: Unfortunately only $200,162.

 

The mitigation of taxes is a big part of GBWM. For starters, we keep track of the tax treatment of your assets. And for taxable accounts, it is important to track the gain or loss of each position. Furthermore, through the DYNAMIC tax projection capability of the program, we can model fluctuating tax liabilities. For example, in years that may have higher withdrawals than others, we determine from which accounts to fund the need that triggers the least tax and then makes sure the forecasted taxes are reflected in the cash flow modeling. The rates used at the various tax brackets are issued by the Internal Revenue Service and updated in the program regularly.

 

From the investment side, we utilize location management to mitigate taxes. Not all assets are taxed equally. Bonds are deemed to be tax-inefficient as they are taxed at the higher ordinary rates. On the other hand, stocks often qualify for less punitive capital gains rates. Unlike bonds that can only mature at par, stocks also hold the possibility of appreciating above their purchase price. Therefore, in designing and maintaining the investment portfolio, we will make sure most if not all of the equities are held in taxable or tax free accounts while the bonds will be over weighted towards tax deferred accounts.

 

Just like fees, taxes are part of the costs of having wealth. By aggressively keeping all costs low- including taxes, The GBWM process we employ enhances and/or preserves wealth.

 

INFLATION

As the evil twin of taxes, inflation is equally as destructive but perhaps less visible. To a large extent, slow inflation is more pernicious than double digit-out-of-control-inflation. When an enemy is known, it can be defeated, but slow inflation is a lot like high blood pressure. You may feel fine, but by the time symptoms begin to manifest, it’s too late.

 

Our modeling of future possibilities includes the ability to apply a general rate of inflation as well as individual rates to each input item. This is very important for maintaining the accuracy of our modeling. As of 4/15/2014, the Bureau of Labor Statistics posted that the inflation rate in the USA is 1.5%. However, the Dept. of Agriculture expects food prices to rise 3.5% in 2014. Increases in food prices typically lead the inflation rate of everything else. Currently, we are modeling a general rate of inflation of 3.0%. However, some cash flows, such as education spending are set higher than that while fixed mortgage payments don’t experience any inflation rate at all. In building your personal Goals Profile, we make sure that inflation is taken into account as accurately as possible.

 

The bottom line is that by constantly adjusting the assumptions for taxes and inflation, we are able to change advice when necessary and maintain a FUNDED status of your goals. Let’s make the most of the one life we have! Our GBWM process enables us to maintain a perfect balance of Comfort and Confidence to do just that.

 

Regards,

Richard Van Der Noord, CFP®

Certified Financial Planner™

Registered Investment Advisor Representative

 

 

Notice: Van Der Noord Financial Advisors, Inc. is a Registered Investment Advisor in the State of South Carolina.  This should not be construed as a solicitation or investment advice.

 

Confidentiality Notice: This e-mail communication and any attachments may contain confidential and privileged information for the use of the designated recipients named above. If you are not the intended recipient, you are hereby notified that you have received this communication in error and that any review, disclosure, dissemination, distribution or copying of it or its contents is prohibited. If you have received this communication in error, please notify me immediately by replying to this message and deleting it from your computer. Thank you.