How to Avoid Your Own Personal Financial Crisis
Delivered courtesy of Financial Services Representative R. Sherman On, New England Financial
When it comes to identifying solutions for righting today’s economy, there are plenty of differing opinions to go around. From raising to lowering taxes on the rich, from increasing to decreasing government spending, from lowering to raising interest rates, and from rescuing banks or letting them fail—we’ve heard it all. These days, it seems there are “experts” behind every idea on how the next financial crisis should be avoided. After all, one financial crisis is quite enough, thank you.
Rather than looking to the folks in Washington to make things better, maybe it’s up to each of us to take control of our own personal planning and start taking actions we believe will benefit ourselves and our families in the long run. One way to begin is by recognizing there’s a lot of risk and uncertainty out there, and that planning to help mitigate risk and deal with uncertainty can go a long way toward keeping our personal financial goals on track. Otherwise, a personal financial crisis could develop (to go along with that global one the world is working through.)
Despite what seems to be uncontrollable economic forces, there are plenty of actions that can be taken today to incorporate “risk mitigation” into your financial decisions, to avoid having a personal financial meltdown.
From a financial perspective, consider some of the more common risks everyone faces:
• Longevity Risk – Outliving your ability to support yourself and your family financially.
• Mortality Risk – Dying without properly protecting your family, your business or your assets.
• Health Risk – Having to pay for a costly long-term illness, whether it’s your own, or the illness of a close family member.
• Credit Risk – Not being able to borrow to grow your business or facilitate personal capital expenditures.
• Market Risk – Not being able to sell your business or other important assets for its fair market value.
• Inflation Risk – Having the cost of goods and services go up, especially after retirement.
• Creditor Risk - Having lawsuits and/or bankruptcy potentially erode your life savings.
• Income Tax Rate Risk – The chance that income tax rates will increase - just when you need to draw down income taxable retirement assets.
Obviously, any one of these risks could significantly impact your ability to keep your financial plans on track. However, a combination of these risks can be even more devastating. Imagine the outcome to the owner of a business who is about to retire if the market value of the business were to decline, the income tax cost of taking retirement distributions were to rise and inflation hikes were to make everything more and more expensive.
Now is the Time to Consider Taking Action
What combinations of risk keep you up at night? Whatever your answer, now is the time to consider taking protective action to help mitigate the risks that could upset your plans for tomorrow.
Let’s look at two hypothetical scenarios:
If you have pre-tax money invested in tax qualified retirement savings and believe there’s a strong possibility marginal income tax rates will go up in the future for you, consider one or more of the following:
If Tax Rates Rise: Maximize contributions to your tax qualified retirement savings plan, thus creating larger income tax exclusions or deductions for those contributions at the higher tax bracket.
At Retirement: To the extent possible, match future taxable retirement plan distributions with future personal and/or business income tax deductions to potentially create at least a partial tax offset.
Today: Diversify your retirement savings by using techniques and financial products that provide tax-favored retirement distributions and/or risk mitigation options, such as a Roth IRA or Roth 401(k), Life Insurance and Annuities.
If you are a business owner, it’s possible the value of your business will be a significant component of your future retirement income. If you believe it may be difficult for you to sell your business for its fair market value when you retire, consider one or more of the following:
• Establish a funded buy-sell arrangement between you and your current business partners, key-employees or even competitors. This will allow you to establish a value (by formula or otherwise) and a buyer today for a sale that may occur many years from now.
• Create a leveraged Employee Stock Ownership Plan (ESOP). In addition to providing benefits to eligible participants, this will allow you to sell your stock to your employees on a tax-advantaged basis during your working years and at retirement.
• Take on an associate or junior partner to create a natural buyer. You may want to consider your children or other family members, even if they’re not yet ready (or you’re not yet ready to make the transition). With proper planning, family business succession arrangements can work out well for everyone concerned.
Being aware of the risks that impact you the most is a critical first step to risk mitigation. Next, identify your financial goals and objectives. Without clearly defined financial goals, opportunities you can take advantage of are much more difficult to recognize or implement. Of course, implementing an action plan to counter the risks you uncover is just as important, which is why it’s important to work with financial, tax and legal advisors to help ensure that even in times of economic uncertainty, you’re making certain your financial goals stay on track.
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of financial products and services. You should seek advice based on your particular circumstances from an independent tax advisor.
MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.
Metropolitan Life Insurance Company, New York, NY 10166
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