Balancing Equity, Assets, and Income

by BTN Members Sonya Wong & Paul Javaheri

Many people believe that there is only one or a few answers for them to build wealth or that certain financial rules of thumb will withstand the test of time. For example, many people believe that saving money in a 401(k) is the most advantageous way to secure retirement. What they do not realize is that the money that they worked so hard to earn could be exposed to a wide variety of risks (market, inflation, tax, etc) during their retirement years.

What will help people weather the storm is to have assets that will help them address different types of risk. With a $31T deficit looming over our nation, what risks do you think will rear their ugly heads? Most financial experts surmise that tax risk will dominate, particularly when the individual income tax cuts passed through the Tax Cuts and Job Act of 2017 will sunset in 2026.

In our recent presentation about “How Money and Equity Works in Retirement”, Paul Javaheri and I briefly discussed financial topics that most people have misconceptions about – reverse mortgages, cash value whole life insurance and long-term care insurance. Harboring these types of prejudices could limit their ability to protect their investments and other assets. These vehicles can serve as buffer assets if designed correctly in a financial or retirement plan.

Paul compared different scenarios in years of sharp stock market declines where just the mere ability to skip one distribution or a few distributions meant the difference between preserving retirement wealth or burning through it in less than 30 years because there were no buffer assets available. I gave an overview of the timetable that retirees must take their Social Security and Required Minimum Distributions. I also brought everyone’s attention to the Safe Withdrawal Rate which is the recommended annual rate at which retirees should withdraw from their retirement assets. Up until two years ago, the Safe Withdrawal Rate was 4%. In the face of rising inflation and market volatility, experts now recommend a Safe Withdrawal Rate of 3.3%.

The flexibility that buffers assets offer gives retirees the ability to delay or accelerate these payments and it can impact how much cash flow can be available to a retiree to fulfill income and legacy needs.

It is advisable for people to review their financial goals and plans every year to make sure that they are on track to achieve their desired financial outcome (retirement, education funding, etc…). It is also recommended that people planning for their retirement gather their mortgage brokers, financial advisors and tax professionals all on the same page to coordinate a cohesive plan and to navigate the ever-changing risk landscape.