Tax Planning and Wealth Management: Episode 100

How do taxes factor in to your financial plan? Many people have never given their advisor a tax return much less seen an annual tax report or estimate. Listen in this week for more of my philosophy of tax planning and why it's a central part of my process! Thank you for listening. 

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JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR

Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com

1780 Hughes Landing | Suite 570
The Woodlands, TX 77380

Music by bensound.com

Transcript

Josh Klooz: 0:47

and welcome in again to the Wisdom of Wealth podcast. Thank you so much for joining me today. In the past few episodes I've focused on planning for your expenses once you've stopped working and once you're financially independent. I've made a few jokes about that whole process and how it typically is one of the last things that people look towards. But also I hope that you've come away from those episodes with the idea that it can be a very fruitful endeavor.

Josh Klooz: 1:18

I don't know, but if you're like me, often it's a very helpful and healthy thing to review not just my actions in life, but also what I'm spending time and money on and asking hey, is that actually bringing me joy, is it bringing me peace of mind, is it bringing me fulfillment? And if the answer is no, then I reevaluate things. You've heard the adage we buy things we don't need with money. We don't have to impress people we probably don't even like, and I find that it's while that stings just a little bit, it stings for a reason. So the next item that I wanna focus on with that basis in mind is tax planning. Typically, for a lot of folks, one of the largest fixed expenses that they have comes in the form of taxes, and I find that far too often, taxes are more closely resembling an autopsy of decisions that were made whether it be planning or investment decisions in the past, rather than something that is proactive, and I wanna try to counteract that to whatever degree I possibly can today, in the time that we have. I find that tax planning is again, probably it runs neck and neck with expense planning of people just assume that there's not a whole lot of thought or planning that needs to go into it, and so they just don't necessarily even put any thought towards it. So, not to be cliche, but beginning with the end in mind, it is very helpful to take a look at what your expenses are going to be when you need to drive cash flow from your investments and furthermore, ask yourself is this the most tax efficient way of deriving that cash flow?

Josh Klooz: 3:21

If you've followed me for any amount of time, you've heard me place an emphasis upon having three buckets of taxable income or cash flow, and I want clients to have, and prospects to know that they need to have a bucket of money that they can access tax-free, a bucket of money that they can access at capital gains rates and a bucket of money that they can access at income tax rates. And the reason for that is I want clients to be able to blend together a tax rate that makes sense for them and that makes sense for their cash flow and that doesn't give up unnecessarily their hard earned dollars because it's tax inefficient. As crazy as it may sound, I do project what clients are going to be spending from an average tax perspective, both today, 10 years from now, when they reach 75, and maybe even into their latter years, into their 90s. And the reason I do that is I want to see outliers. I want to see if there are ways in which the portfolio that we are putting together for a client is going to subject them arbitrarily to a higher than necessary tax bracket. Yes, we don't necessarily know what the tax rates will be five years from now, 10 years from now and so on, but we have a general idea and with that general idea we can go ahead and backwards plan what we need to do Once we've established. Again, that's back to why figuring out what your expenses will be to the best degree possible is so helpful and so vital is because it allows you to take a hard look at how you're going to derive that cash flow.

Josh Klooz: 5:09

Many people in today's society simply assume that I'm going to save as much as I can for as long as I can and I'll talk about this in the newsletter a little bit but that's the equivalent of revving the engine of your car. It sounds cool, it may even attract a little bit of attention from those around you, but it's not efficient, you're not going anywhere and sometimes you may be even doing more harm than good in certain instances. Now I'm not advocating not saving. What I'm advocating for is saving smartly, for beginning with the end of mind, placing your family's unique needs and timelines in view and planning for the most efficient path to get there. If you're listening to this and whoever you are working with has never read a tax return they haven't even asked for a tax return, or they asked for one, but it was more of a check the box exercise Now's the time to start making changes and start demanding the level of service that you deserve. In my opinion, if you are listening to this or reading this and you're saying, gosh, I feel like I'm doing everything necessary, but I really didn't even think about what the tax consequences of my savings today are doing. Now's the time to start thinking about that.

Josh Klooz: 6:39

A general rule of thumb that I'm always asking for clients and hopefully I can get a hold of clients well before they finally stop working or they're financially independent. The general rule that I ask for them is is the tax rate that you're paying today going to be higher or lower than what you'll be paying tomorrow? And the only way we can answer that question is if we've actually done the planning necessary. It sounds simple, it sounds rudimentary, but I assure you, while it is simple, it takes a discipline that typically the marketplace is not willing to give to certain clients and certain folks that I come across.

Josh Klooz: 7:28

Very rarely and I'm saying maybe one in 10 in my personal experience have I ever found a client or a prospective client that comes to me and says hey, you asked for tax returns too, because it's just so uncommon. I don't know why that is. I'm not going to speculate, but I am going to tell you that there's value to be had there. So my call to action today is again think through what you want your lifestyle to look like once you're financially independent and then ask yourself how can I meet those? How can I meet that need in the most tax efficient manner possible. I'll go ahead and leave things there for now. Thank you again for joining us. If you have any questions, as always, please reach out via email. I'm happy to answer those questions for you and, as always, please know that I'm wishing you and your family continued truth, beauty and goodness in the road ahead. Have a great day.