Ice Cream and Spinach
Written by: Philip Lockwood
It’s an unfortunate reality that children aren’t compared to politicians often enough. If you ask my four year old what he wants for dinner, you’ll get a popular and rather incoherent selection that could quite easily win his district’s heart – cinnamon rolls, pancakes, french fries, and, of course, ice cream. As a parent, it’s my job to think slightly more long term and make sure to slip in a few life-sustaining options – a carrot, some radishes or, a true struggle in my household, a bunch of spinach. I don’t take pleasure in doubling down after he claims to be ‘too full to eat more’ a few bites before reaching the greenery, but by coupling actual nourishment with future privileges, and the removal of those privileges should he not find room for a few more mouthfuls, I help ensure the long term health of my kid.
Our political system has no parents, and so politicians are prone to picking ice cream every night. When it comes to measures relating to National Debt, Social Security, and Medicare, they would rather avoid finding a sustainable solution as the healthy options often don’t win elections. Spinach never beats Ice Cream in the popular vote. But if we are going to have a healthy financial system in the future, we must have healthy strategies in the present. And at some point, the doctor will finally force a diet change whether we like it or not.
In my last article Blank Check I referenced actions that can be taken to reach that sustainable diet, but for whatever reason I don’t think the powers that be are currently taking any cues from a financial advisor in Iowa. So I must move forward operating under the assumption that ice cream is on the menu until those programs are at the tipping point of default and the doctor steps in.
What can the average investor do? This is the point where I let you know that I am not giving individual advice to you the reader – I am painting with a very broad brush and you just happen to be watching the show. If you have an advisor, use this information to have an informed discussion with them about your current portfolio. To help you have that discussion, I first will provide a 10,000 foot view of asset location.
By now many of you know I am a parent. And hopefully you know that parents teach best through fables that children can relate to. I too often find that financial advisors speak over their client’s heads to show them how ‘intelligent’ they are. I like to take a different approach and break down each complex financial concept into a story I could tell to a 7th grade class and have them understand it. I find that this approach forces me to contextualize complex financial concepts in a more digestible manner. And as long as we’re eating spinach, we may as well digest it.
One of my favorites fables is called The Two Frogs. They were freshly retired frogs, spending their days lounging in a pool, as retired frogs are keen to do. One day, the water suddenly dried up – it probably was poorly maintained by the frog resort. So off they set to find a new place to soak. They passed by a deep well, so full of sparkling water that they could barely see the bottom. The first frog, sick of the sun, prepared to jump in. The second frog, a bit more thoughtful, decided to keep looking, saying ‘Fred, think about it: if this one leaks too, how will we get out of such a deep hole?’ The lesson we’ve so often ignored? Putting all of your eggs in one basket, no matter the basket, can have negative consequences.
Many people have chosen or have been ‘educated’ to get their tax breaks now by putting money in tax-deferred investments. Done with consideration this strategy can be a great option for individual investors, but there are other options out there. It is very important to consider your additional options and the role those options will play during the distribution phase of your retirement. If all your ‘water’ is in one well please consider the ramifications if that well sprung a ‘leak’ – in this case, the potential for lost deductions and/or higher taxes could be that leak.
There are several asset location strategies that can be implemented. You have multiple retirement savings pools to consider, many have a Roth 401k available, or qualify for a Roth IRA contribution. Others may benefit from putting money into a taxable brokerage account and being taxed as short term or long-term capital gains instead of income tax. It may be prudent to explore the multiple pool strategy to give yourself options if our congressional leaders decide to raise taxes in the future.
Without exploring other options, or additional pools to compliment your tax-deferred pool you may be left to the mercy of your congressional leaders to determine what future tax rates will look like, and if the water drops quicker than you expected, you may be forced to scale back your retirement plans to accommodate for a faster leak.
I would hope you are wondering why your adviser has not discussed this potential leak in your pool – unfortunately, it is often in their best interest to have you defer money now and leave the distribution conversation to someone else. To get money in all three pools can require a conversion from your traditional IRA to a Roth IRA, a move that lowers the amount of money you have on hand as you have to pay taxes on the conversion. If you lower your investable assets then you in turn lower the advisers fee-based income. But if you plan appropriately you can make these conversions over a period of years, controlling your tax liability and making conversions in the current tax-bracket, one you are aware of. By focusing on the tax event required to make this transition instead of the flexibility it will grant you later in life, they may steer you into focusing on digging your pool deeper. It is important to think about all of the consequences of your asset location strategy.
Many folks have heard of asset allocation relating to diversification of your portfolio. It is my calling to tell potential retirees about asset location and diversification of your taxation. Politicians will someday have to make a tough decision to put some spinach on our plates – whether that is higher tax rates, lower government spending, social program changes, higher premiums, or a combination of all of these. Although it may not taste great, it is essential for the health of our country and for our entitlement programs. If you agree that some spinach is in our future, it is important to look at your asset location now and decide if you need to begin to make changes. I am always available to help you look at your asset location strategy and help you develop a plan for your future.
|Philip Lockwood | Founder + Managing Partner|
|Address: 3100 Ingersoll Ave. Des Moines, IA 50312Phone: 515-274-8006|
|Fax: 515-274-8033Email: Plockwood@parklandrep.com|
Website: Lockwood Financial Strategies
Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC