Wealth Redefined: Charting the Way to Personal and Financial Freedom

by Bob Reby, Gregg Ruais (With)

Overview

Wealth Is More than Money

For most people, the word wealth conjures images of material possessions and luxury: fancy jewelry, exotic automobiles, opulent living quarters, and vacations in Southern France. To become wealthy is the pinnacle of the iconic American Dream. When you can afford the best of everything you want, you get to live happily ever after . . .

That may be the traditional vision of wealth, but it is not most people’s experience.

Drawing on over twenty years of experience as a Certified Financial Planner, author Bob Reby explores the idea that wealth means different things to different people. Your health, relationships, and family are all components of wealth, and your financial plan should be in line with those values. Wealth Redefined will help you find your unique version of financial independence and live happily ever after.

Product Details

ISBN-13:	9781632991256
Publisher:	Greenleaf Book Group, LLC
Publication date:	07/19/2017
Pages:	210
Product dimensions:	5.98(w) x 9.02(h) x 0.48(d)

Read an Excerpt

CHAPTER 1

Wall Street vs. Main Street

WHAT THE BIG BANKS AND BROKERAGE FIRMS DON'T WANT YOU TO KNOW

"Lesson number one: Don't underestimate the other guy's greed."

— FRANK LOPEZ, SCARFACE (1983)

WHEN YOU NEED professional financial advice, how do you know who you can trust? A traditional approach is to turn to Wall Street institutions: dominant banks with wealth management divisions that have given advice to many generations of Americans. On the surface, this seems like a safe bet. These banks spend millions conducting research on financial markets and developing complex algorithms to guide their buy-sell decisions. They hire and groom the smartest Ivy League graduates as analysts, and the advisors present you with a polished proposal, complete with beautiful charts and graphs that make it look like they have money down to a science.

Too frequently in my career, however, I've seen people from Main Street get bad or incomplete financial advice from these Wall Street institutions. The advice often lacks transparency, results in the client paying commission fees that are too high, and overlooks the tax consequences of where and how they invest their money. Depending on the individual, the added expenses and unnecessary taxes they pay may amount to tens of thousands per year. Accumulated over a lifetime, it's not an exaggeration to say these unnecessary costs may shave five years off your retirement. It may also be the difference between running out of money and sustaining a good lifestyle.

Perhaps even more costly than the unnecessary fees and taxes Main Street ends up paying as a result of their advice from Wall Street is the advice they aren't getting. Most people I sit down with who have an advisor at a major bank are not getting advice on critical topics such as the type of insurance they should buy, exactly how much money they can afford to spend each year without running out of money, and how and when to claim Social Security and Medicare. These areas of personal finance are arguably as important if not more important than the funds you invest in. Ignoring these issues may not result in losing a few percentage points of earnings from your portfolio, but it may result in a complete loss of financial independence.

To protect yourself and your family against this poor or incomplete advice, it's critical to know where Wall Street leads Main Street astray, the reasons for the poor or incomplete advice being given, and how you can identify the warning signs that are revealed when an advisor isn't giving you the quality of advice you deserve.

Is Your Advisor Putting Your Interests Ahead of His Own?

Many people are surprised that half of professional money managers do not invest their own money in the same portfolios they build for others. This is a startling figure that begs the question, Why not? If they believe in these portfolios and investments enough to sell them to the public, why wouldn't they invest their own money in them?

Unfortunately, Wall Street often has a conflict of interest with its clients. Contrary to popular opinion, many advisors at these large banks are not required to put their clients' interests ahead of their own when giving financial advice. Some advisors may recommend investments that include fees because those are the investments that pay them commissions. It's hard to blame them for doing what they need to do in order to pay the bills and feed their families, but it's also difficult to trust the advice when they get paid more for selling you an investment that's worse for your family.

The term advisor has become a misleading job title in many cases. Registered representatives at these banks used to be called stockbrokers, a term that's been stigmatized through pop culture and mainstream media. Now just about everyone who sells securities has the benign title of financial advisor, or simply vice president, even though the job description hasn't changed much.

Many of these brokers are not fiduciaries to their clients. This means they are held to a lesser standard called suitability, which means the investment strategy they recommend to clients must meet the objectives of the investor. Suitability, however, does not mean that the investments recommended are the ones most likely to help an investor reach their objectives or even that the advisor selling the securities believes that it is the best investment for the client.

This suitability standard allows the advisor to sell securities and funds with unnecessarily high fees, even though there is no correlation between fund expenses and fund performance. In some instances, the same exact investments may be available for no fee, but the client never sees those opportunities because the advisor cannot earn a commission from them.

There are also hybrid situations where the advisor almost puts your interests first, but not completely. Large investment banks underwrite certain financial products, such as tax-free municipal bonds or master limited partnerships. They earn more profit from selling products they underwrite themselves, because they make money through multiple channels that way. So there might have been a better tax-free municipal bond for you to own, but you never got a chance to actually see it because your advisor may have an adverse incentive to sell you the one being distributed by the company itself. The advisor may not be selling you something that's bad for you — as a tax-free municipal bond may be what you need — but the particular one sold to you was not the best of its class.

The first step to safeguarding against this type of conflict of interest is to understand the type of financial advisor you're working with and the extent of his or her legal obligations to you. To avoid the conflict of interest inherent in working with a commission-based broker, you can work with a financial advisor who has a fiduciary duty to put your interests first, a Registered Investment Advisor (RIA) or a Certified Financial Planner (CFP). Being independent, RIAs have a wide universe of products to make available to you, and they are obligated to recommend the best option for you. A Certified Financial Planner is held to an even higher standard, including professional experience requirements, ethics coursework, and continuing education.

Now, it's important to remember that while fiduciaries are held to a higher standard, this does not mean that they necessarily have more integrity or ethics. There are fiduciaries who do not act in a fiduciary way. Bernie Madoff was a fiduciary.

What's more important than a title, of course, is that that the advisor is acting in a fiduciary way and giving advice in the spirit of "What I would do if I were you." This should be the golden rule of the financial advisory industry.

How do you know if an advisor meets this standard? Here are a few questions you can ask yourself about your current advisor (or questions to ask a prospective advisor) in order to determine whether the advice you're getting is in your best interests and truly comprehensive:

• Does your advisor talk to you about the tax ramifications of where you put your money and when and how you take it out? • Does your advisor give advice based on your personal values, dreams, and goals for both you and your family?

• Does your advisor offer advice beyond assets under management, such as your overall spending rate, the risks to your lifestyle, and Social Security and Medicare selections?

• Does your advisor proactively communicate with you during recessions or market downturns and coach you away from emotional investing based on fear and greed?

If you answered yes to these questions, you're likely working with an advisor who's looking after your best interests. If not, you probably have holes in your current financial plan and would benefit from more comprehensive advice.

The following sections of this chapter are dedicated to each question, why it's important, and how your answer helps reveal the quality of the advice you're getting.

Does Your Advisor Talk about the Tax Ramifications of What You Do with Your Money?

Taxes are one of the most significant expenses in nearly any household. For most retired households, it's the greatest expense. Yet most advisors do not review their clients' tax returns each year to help save money on taxes, increase cash flow, and improve quality of life.

If advice on how to maximize post-tax income does not come from a financial advisor, who will it come from? Most accountants are hired to review your income after your investment strategy has been in place. Their focus, generally, is minimizing your tax bill after the fact. The best accountants may advise you on how to minimize taxes on your investment income going forward, but they aren't the ones executing trades for you. That responsibility falls on your advisor (or you, if you handle your own investing).

Here are a few ways an advisor who's giving comprehensive fiduciary advice can help reduce your income taxes:

Advise how to invest your assets to minimize your current income taxes

There is almost always room for improvement when it comes to minimizing your income taxes, especially if you're earning more than you're spending. Once you have enough cash reserves for emergencies and unexpected expenses, it's usually to your advantage to invest your surplus in a qualified retirement account, which means you get to invest your pretax income and defer taxes until it's time to withdraw funds in retirement. To minimize income taxes preretirement while you're in the wealth accumulation phase, maximize 401(k) or Traditional IRA contributions. This is really simple advice that has an immediate positive impact, but many advisors will overlook the opportunity.

Advise how to invest your assets to minimize income taxes in retirement

As you approach retirement, it's often a good idea to also have an account outside of your retirement accounts. How can this be used to your advantage? Having a standard non-retirement account may reduce your income taxes when you're withdrawing from your assets in retirement. Gains from these non-retirement accounts may be taxed as long-term capital gains, which is lower than the tax rate on ordinary income. In addition, your non-retirement account may have a loss, which enables loss harvesting at the end of the year. Loss harvesting means you sell assets at a loss, and use that loss to offset your other income. This minimizes your income tax bill in a way that having a 401(k) alone cannot.

While I realize this advice may seem to contradict my first point about the advantages of retirement accounts, this is a delicate balancing act that should not be implemented without thought and strategy.

Telling you when and how much to withdraw from an IRA account

There is really nothing worse than finding out after you've made a decision that you've thrown away thousands of dollars unnecessarily. After you've reached the minimum distribution age of 59 ½ to withdraw from qualified retirement accounts, it's critical to consider the income tax ramifications of your withdrawals. Because you contribute to these retirement accounts with pretax money and your contributions grow tax-free, your distributions are taxed as ordinary income. Income taxes are progressive, and all of your ordinary income counts; so if you withdraw too much too soon, you'll end up in a higher tax bracket. This affects all of your income streams. On the other hand, if you take less than your required minimum distribution, you may pay a penalty later for not taking it sooner. A true Certified Financial Planner will help you avoid making these mistakes.

Choosing how to take an inherited legacy

When your children inherit a legacy, how they take it can result in significant tax savings. An advisor should give sound advice on the tax ramifications of taking the inheritance in a lump sum, deferred over five years, or spread out over a lifetime. Keep in mind that estate planning is a highly specialized field. Financial advisors should know about the topic, but almost none of us — myself included — know everything there is to know. Good advisors recognize their own limitations and will have a network of specialists to whom they can refer you for more advanced advice.

Does Your Advisor Give Good Advice?

Having a comprehensive financial plan is not a goal in and of itself. What matters most is everything that comes with it: reduced anxiety over money, more confidence in knowing the future, and the freedom to pursue your passions. A financial advisor who doesn't first take the time to learn about you, your family, and what you value and love the most cannot devise a plan that's right for you ... unless he or she happens to guess correctly about these things.

To illustrate how a sound financial plan changes with individual needs and preferences, here are three hypothetical situations, all of which include investible assets of $750,000 at the time of retirement. Note that the dollar amount here is not as important as the process of identifying goals, prioritizing based on your values, and developing a financial plan that best utilizes the resources available to you to achieve your goals. This process is relevant whether you have a hundred thousand, one million, or ten million.

Family #1

• Investible Assets: $750,000

• Family Situation: Three successful children with high income for whom an inheritance would be "nice to have" but not at all necessary.

• Lifestyle Goals: Living near family in the tristate area during spring, summer, and fall, but likes to stay in Florida during the winters. Enjoys traveling and loves visiting Europe.

• Financial Strategy: Withdraw 6% of total investible assets ($45,000) each year to cover living expenses (along with Social Security income), and keep the remaining 95% in a 60%-40% mix between equity investments and fixed-income investments to maintain long-term growth.

The 6% "speed limit" on withdrawals exceeds the 4% rule of thumb because the couple recognizes that as they age, their ability to travel may become limited and they are willing to make the tradeoff of having lower income capability in the future in order to see as much of the world as possible while they are still young enough to do it. In addition, they are confident their children do not need an inheritance in order to achieve their own financial independence. Due to inflation, every five years they will adjust the withdrawal allowance up 15% to maintain the same quality of life (i.e., in five years, the withdrawal increases to $51,750).

Family #2

• Investible Assets: $750,000, and a business that can be sold for $150,000.

• Family Situation: Sixty-five-year-old couple with two children; the husband also has a thirty-year-old child with special needs from a previous marriage.

• Lifestyle Goals: It is important for the man to have peace of mind in knowing his special-needs child is cared for after he passes away. He also wants to ensure his two kids with his current wife are not excluded from the inheritance.

• Financial Strategy: Establish two separate trusts: one for the special-needs child and one for his two other children. The trust for the special-needs child should be held by a competent, trusted family member, who will distribute the money in a deferred manner to the special-needs child. This avoids inflating the net worth of the trustee, which could disqualify him from government benefits.

Family #3

• Investible Assets: $750,000

• Family Situation: Married couple with five children and $200,000 remaining on a mortgage at 5% interest. There is a family history of health issues on the father's side.

• Lifestyle Goals: Lead a comfortable lifestyle in their current home, spend time with family, and have peace of mind knowing that, should health issues arise, the rest of the family is protected.

• Financial Strategy: First, refinance the remaining mortgage into a fifteen-year loan with 3% interest. The cash the couple saves by not paying the mortgage off in full now can produce a higher rate of return than the 3% in interest they will pay. Plus, the 3% interest is a tax deduction. Second, the couple can purchase a long-term care insurance policy, which can cover the high cost of long-term care (on average, $350 per day in their home state of Connecticut) if the need arises and help keep the family finances stable.

(Continues…)

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Excerpted from "Wealth Redefined"
by .
Copyright © 2017 Reby Advisors, LLC.
Excerpted by permission of River Grove Books.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

INTRODUCTION Wealth Redefined, 1,
CHAPTER 1 Wall Street vs. Main Street: What the Big Banks and Brokerage Firms Don't Want You to Know, 13,
CHAPTER 2 Keeping Score: Systematically Minimizing the Risks to Your Family's Lifestyle, 27,
CHAPTER 3 What's Most Important to YOU?, 49,
CHAPTER 4 Maximizing Income Capability to Support Your Lifestyle Goals, 65,
CHAPTER 5 Protecting Your Income from Catastrophic Risks, 81,
CHAPTER 6 The Most Critical Financial Risk Facing Investors Today: Behavioral Risk, 99,
CHAPTER 7 How to Avoid Outliving Your Assets, 117,
CHAPTER 8 The Myth of the Great Money Manager, 133,
CHAPTER 9 Opportunity to Capture: Minimize Your Income Taxes, 145,
CHAPTER 10 Leaving a Financial Legacy to Your Loved Ones, 161,
CONCLUSION The Most Important Investment You'll Ever Make, 175,
Acknowledgments, 187,
Index, 189,
About the Authors, 196,