Summary: Choosing the Right Investments Matters The Baby Boomer generation that has seen its financial health shaken twice in the past decade thanks to ongoing market volatility. Members of Generation X, Y, and the Millennials are also feeling the pinch after struggling to find decent employment after completing college. Many people find themselves feeling disconnected and powerless. When it comes to preparing for the future, all of us still have choices. Choosing the right investments is more significant than many people realize. To understand the word investment we must first understand how it has evolved. Investments are really just financial instruments. Regulations from the Financial Industry Regulatory Agency that cover what can and cannot be said about “investments.” FINRA generally categorizes stocks, bonds, or securities as investments. In other words: put your money into those investments and it will be subject to certain risks including taxes, inflation, and market volatility. Of course, there are other ways to invest besides those that are subject to risk. For instance, we invest in education for our children and ourselves. We can store a year’s supply of food, fuel, and other preparedness items as investments. So, what would you call something that you can put money into and it can be used for income that is not tax-deferred but tax-free? Ideally, this investment would have liquidity so you could access your money with just a phone call or electronic funds transfer. It should provide real safety so that during those years the markets decline, you don’t lose money. Likewise, in those years when your money grows, it should lock in those gains as newly protected principal. Finally, this instrument should have stable rates of return that is not only realistic at an average of 7, 8, or 9%, but is also tax-free. And when you go to take out this money, it also remains tax-free. Remember, this is not a retirement plan as defined by the industry. To them, a retirement plan is something you do under the Internal Revenue Code section 401(k) or as an IRA. But what we need isn’t a traditional retirement plan or investment as defined by financial industry regulators. A Metaphor To Remember Suppose you were a farmer and could buy your seed in the springtime and only pay tax on the seed you purchased. Or, if you chose, you could wait until fall and pay tax on the seed and everything you sold your harvest for. Which would make more sense? The latter one could be a good representation of a traditional IRA or 401(k), a pension or profit sharing plan, a 403(b), or 457 tax-sheltered annuity. You put in the seed money with pre-tax or tax-deductible dollars, but during the harvest, you agree to pay tax because you were told you would be in a lower tax bracket. Unfortunately, ending up in a lower tax bracket has not been axiomatic for over 25 years. But people still do it because they believe that it’s the best way to save. They believe that this is how their money is going to grow the most. But the truth is, you choose investments that will generate the most, based upon the time in life when you’re going to need the most. So let’s say that you only had to pay tax on the price of the seed, but later on in the fall when you sold your harvest for a whole bunch of money—you could do that without paying tax on what you sold your harvest for. You want your harvest to be tax-free. Do you realize that 91% of Americans still put their retirement money into tax-deferred savings plans? A Roth IRA may be a step in the right direction, but there are still far better ways to save and have tax-free retirement income. If you’re still using a tax-deferred vehicle, you must understand the difference between a strategic rollover and a strategic rollout to protect you against higher taxes in the future. Don’t wait until retirement to deal with it. An ounce of prevention is worth a pound of cure.
