What working with the homeless taught me about financial planning

I learned the importance of having a plan at a young age from my dad, homeless camp, and bag lunches.

My father was a pastor and he considered helping the homeless a calling. So, on Saturday afternoons, my family would pack 125 bag lunches, with the contents of those lunches etched in my memory to this day: a bologna sandwich, a bag of chips, and a Little Debbie.

We’d get up at 6 a.m. on Sunday, load our lunch bags into a van, and drive to a park where the homeless were camping. There we distribute the sweets. The sack lunches came with no strings attached, but my father took the opportunity to invite people to church, giving a hot lunch after the service to whoever accepted the offer.

That made the trips from homeless camp to church memorable, because my dad would always ask people to tell him their stories about how they ended their bad luck. As the miles passed, I listened. Some people had been successful at one point, but weren’t prepared for a stock market crash that left their finances in ruins. Others fell on hard times after the death of a spouse. Whatever the story, a common theme emerged: They had no plan to withstand life’s cruelest turns, and that was their undoing.

Those stories impressed me and also taught me this lesson: life can happen to anyone at any time.

Whether we like to admit it or not, that’s true for you and me if we don’t have a financial plan to see us through the ups and downs. We all face many risks in life, but your plan should address at least three of those risks: tax strategy, investments, and longevity.

Tax Strategy

It is common for people to owe money on credit cards, mortgages, and car loans. But many people enter retirement not realizing that their biggest creditor may not be one of these. Instead, it can potentially be the IRS.

That’s because much of most people’s retirement savings are conveniently stored in traditional IRAs, 401(k)s, or other tax-deferred accounts. However, things get awkward when you start withdrawing that money because that’s when taxes are due. And, over time, the money in those accounts has grown, which means the amount owed in taxes has grown with it.

We have seen cases where people have been able to pay significantly less than they thought they would have to pay by employing a tax strategy that helps soften the blow of the now higher tax burden. That is why we discuss potential tax liability with our clients; it’s an important part of overall financial health, especially during retirement.

Take this hypothetical example. If a client has increased his tax-deferred accounts to approximately $1.1 million, he may be quite comfortable with this, until we really look at his potential tax liability. Leaving the money as it is, over time, they could pay $500,000 or more in taxes. Obviously, that changes the landscape, but what can they do about it? We talked about turning the money into a Roth account. Roth accounts grow tax-free, and you don’t pay any taxes when you make a withdrawal (as long as you’re age 59½ or older and have had a Roth account for at least five years). You pay taxes when you convert to Roth, but we’ve seen many times that it can be significantly less than if a customer had chosen not to convert.

This could be a good time to do a Roth conversion because taxes are at some of their lowest levels in history. That may not last, though, because the Tax Cuts and Jobs Act of 2017, which brought those low tax rates, ends at the end of 2025.

Investments

Everyone hears about the importance of diversifying. But too often, people don’t truly diversify their assets, they just allocate them. They can invest in a variety of stocks, but variety alone doesn’t limit the risk that market volatility puts on your portfolio.

Instead, what you are looking for are different levels of risk. For many people looking for diversification, a portion of their portfolio should be aggressive, invested in stocks or exchange-traded funds (ETFs). That’s where you stand to enjoy the biggest profits, but you also risk the biggest losses. You may also want to have another part of your money in moderate to low risk investments, such as bonds or real estate. Finally, you should set aside money where it’s not subject to the vagaries of the market, such as money market accounts, certificates of deposit, or fixed-index annuities.

Longevity

On the surface, longevity doesn’t seem like a risk. A long life is a good thing, right? But the risk here is that you may outlive your money. Many of the clients I see are baby boomers who were taught to have a three-legged stool in retirement: Social Security, savings, and a pension.

For many people, pensions are a thing of the past, leaving that metaphorical stool precariously balanced on two remaining wobbly legs. Social Security can have a hard time keeping up with inflation, so personal savings can take on a lot of the responsibility for balancing the retirement stool. With that in mind, we help guide our clients to use at least a portion of their personal savings to build their own pension, such as fixed-index annuities. That creates an income stream that you can see through your retirement. We also use accounts that have some type of rider to cover long-term care or have an income payment, such as indexed universal life insurance.

A good first step in creating your financial plan is to talk with your advisor about your goals and concerns. In addition to tax strategy, investments, and income, you may also want to discuss health care and legacy.

Your advisor should then design a written plan for you that addresses those concerns and helps you reach your goals. Afterward, I recommend meeting with your advisor at least once a year, so the two of you can review the plan and decide if it requires revisions due to changed circumstances.

Remember, life can happen to anyone at any time. A bologna sandwich, a bag of chips, and Little Debbie might make a good bag lunch, but a solid financial plan is more nutritious for the long journey ahead.

Ronnie Blair contributed to this article.

Williams Financial Group, LLC is an independent financial services firm that uses a variety of insurance and investment products. Investment advisory services offered only by duly registered persons through AE Wealth Management, LLC (AEWM). AEWM and Williams Financial Group LLC are not affiliated companies. 1271539 – 4/22 All investments are subject to risk, including possible loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. References to guarantees or annuities generally refer to fixed insurance products, never to securities or investment products. The guarantees of insurance and annuity products are backed by the financial strength and ability to pay claims of the issuing insurance company. Remember that converting an employer plan account to a Roth IRA is a taxable event. The increase in taxable income from the Roth IRA conversion can have several consequences, including (but not limited to) the need for additional tax withholding or estimated tax payments, the loss of certain deductions and credits higher taxes, and higher taxes on Social Security and Medicare benefits. Premiums Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Founder, Williams Financial Group

Stacia Williams is founder and wealth advisor to Williams Financial Group. She helps clients achieve their retirement goals and dreams through thoughtful financial strategies. Williams has extensive experience working with people across socioeconomic and cultural divides, helping her firm deliver holistic and culturally relevant services to clients.

Appearances on Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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