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Creating Financial Layers of Protection

Season #2

Inflation, taxes, and unpredictable markets may seem like insurmountable challenges to a secure retirement. As a financial advisor and retirement specialist on a personal mission to help one million people retire with financial security, I often encounter investors seeking a magic bullet to protect their retirement nest egg. While there is no one-size-fits-all solution, the secret to weathering the financial storms lies in mastering the fundamentals and adapting them to your unique situation.

Having a Process is Key

Every investor's journey is different, but the principles of sound financial decision-making remain the same for everyone. Having a solid process in place is the key to avoiding blind guesses and the perils of gambling with your financial future.

Investors often ask me: what they should invest in or which specific assets to buy, but the truth is that every person's answer will differ based on their individual needs and life stage. The secret sauce, if you will, lies in understanding and applying the fundamentals to your own situation.

A prime example of this is the current debate surrounding the 60-40 portfolio, which has been a mainstay of retirement planning for decades. With the bond market and interest-bearing investments undergoing significant changes in recent years, it's crucial for investors to reevaluate their strategies.

The question you need to ask yourself; are you investing for today, or are you clinging to outdated methods that served you well in the past?

The key to navigating these turbulent financial waters is having a process in place that allows you to identify and adapt to fundamental shifts in the market. Investors must be prepared to adjust their strategies in response to changing economic conditions to ensure that their portfolios remain well-positioned for the years to come.

So, while there is no magic bullet for guaranteeing a secure retirement, the secret sauce lies in mastering the fundamentals of sound financial decision-making and tailoring them to your unique needs and circumstances. By doing so, you can create layers of protection for your retirement, ensuring that no matter what happens in the world, your lifestyle remains unaffected.

Creating Layers of Protection

Creating multiple layers of protection ensures that even if one barrier is breached, there are still others in place to safeguard our finances. The key is to give ourselves enough time and flexibility to make decisions on our terms rather than being at the mercy of the market, the Federal Reserve, or Congress.

Operating on someone else's timeline often leads to poor decision-making, as very few of us can make consistently accurate choices under immense pressure. Creating layers of insulation against external factors, and being open to taking on calculated risks. By adopting these strategies, we can build a robust foundation for a financially secure retirement, regardless of the challenges the world may present.

Emergency Funds and Credit Lines Are Essential

Credit cards and short-term loans can serve as essential components of the layers of protection we've been discussing. They provide a valuable cushion in the form of an emergency fund, credit card, or securities loan – a lesser-known option that allows you to borrow against your non-retirement investments, often at better interest rates than 401k loans.

These financial tools offer insulation during emergencies, such as when the stock market is down, and you need to cover living expenses or meet required minimum distribution obligations. As a savvy investor, you understand that locking in market losses can harm your long-term financial prospects. Having access to credit cards, short-term loans, or emergency funds helps bridge the gap between your investments' current state and their eventual recovery.

The stock market is highly likely to recover due to the effects of inflation, which causes asset values to rise over time. Consequently, having a loan or credit card in place to cover short-term needs is advantageous. However, it is crucial to weigh the pros and cons of the interest rates on these loans against the long-term impact of locking in losses.

Incorporating these layers of protection into every financial plan ensures that you have funds to live on for the short term, as well as in two or three years, without having to dip into your long-term investments. By utilizing these protective layers, you can safeguard your long-term financial success and maintain a secure retirement, even in the face of market fluctuations and economic challenges.

Protecting Against Inflation

To protect against inflation, some may believe that holding investments like certificates of deposit (CDs) or other interest-bearing assets is the solution. However, here's a little secret: banks will never pay you enough to outpace inflation. They always pay less because they need to profit from the difference. To truly shield our money from inflation, we must be willing to take on some degree of risk.

The only way to outpace inflation is to assume some form of equity risk or, alternatively, excessive debt risk. We need investments that yield returns higher than the current inflation rate, and typically, banks won't offer such rates because that's how they generate revenue. As a result, investing in the stock market becomes essential. Alternatively, some may consider the bond market, specifically the segment with comparable risk levels to equities.

Protecting Against Higher Taxes

Protecting our money from higher taxes in the future is a more complex challenge, as it requires peering into our metaphorical crystal ball to predict the tax landscape. While it's impossible to know exactly what taxes will look like in the coming years, we can create layers of protection and a multi-step plan to prepare for various scenarios, ranging from the worst-case to the best-case situation.

For example, with current historically low tax rates and the Tax Cuts and Jobs Act set to expire in 2026, many people are contemplating Roth conversions. Deciding whether to take advantage of the current tax climate depends on individual circumstances, and the answer will vary for each person. Factors to consider include the potential impact of a worst-case tax increase scenario, the benefits of leveraging current tax rates, and how these decisions will affect your lifestyle.

When discussing tax-saving strategies, it's crucial to examine your motivations and the underlying purpose of your money. Are you aiming to maximize your wealth for your beneficiaries, donate to a cause, or enjoy it during your lifetime? Answering these questions will help guide your decision-making process and enable you to use your money most effectively.

Balancing present and future tax burdens is often a delicate exercise, requiring careful consideration of the probabilities of different outcomes. Taking measured steps to mitigate potential tax increases, without going overboard, is essential to avoid catastrophic mistakes. As deadlines for legislative action on tax policies approach, it's crucial to be prepared to act promptly.

Having a well-defined plan in place, ready to be executed based on the unfolding news and developments, will help ensure you're not exchanging a potential disaster for an actual one.

Next Steps

We talked about how the overall concept of creating layers of protecting in your retirement plan, so you can withstand any financial challenges that life throws your way. The process is all about creating those layers of protection and diversification, ensuring that even if one part of the market goes down, you have something to counteract that.

In my guide The 321 Retirement Plan, I outline the step-by-step approach we take to do this for our clients. You can download the free guide here:

>> Download the 321 Retirement Plan <<

If you have any questions, don't hesitate to shoot us an email. My team and I are more than happy to help. So, take control of your financial future and start building those layers of protection for a more secure and worry-free retirement.