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Are You Really Diversified?

One of the core rules of saving for retirement and investing is never to put all your eggs in one basket. That’s good advice.

When we start working with someone for the first time we generally ask, “How are your investments protected?” Then we get the answer of “Well, I’m diversified between different stocks and mutual funds, so I’m pretty protected.”

Since the advice everyone received when they started saving for retirement said to do just that, most people feel they have done all they can. The reality is that kind of diversification only puts someone in different stocks or mutual funds, which are invested directly in the market.

The market is like the tide, if you are in the market [the tide] then your investments [boat] and going to rise and fall with the market. There is no escaping that. If your money is in the market then you can lose money, no matter what stocks or other funds you may be in. Now, there are exceptions. We saw when COVID hit that most stocks, except for certain pharmaceutical stocks, took a dive. But that is not something that anyone can predict.

So, just because you have money invested in tech stocks, food service stocks, transportation, etc, you still just have a bunch of stocks/funds that are susceptible to risk.

I’ll discuss how to be properly diversified so you have money that can grow but not be at risk in a moment.

The other retirement risk that very few people have any form of diversification for is tax risk. Most people save in their 401K or IRAs tax-deferred. Meaning they get a tax deduction on the money they save now and pay taxes on it later.

This results in all of someone’s retirement income being 100% taxable unless they have a small portion of their retirement in a Roth account.

I ran a report for a new client the other day and showed her how her current IRA value of $450,000 will generate over $390,000 in taxes in retirement at today’s tax rates, which most people believe tax rates will increase in the future.

So, what I showed her was a way to get her taxes in retirement below $190,000. You see, most people don’t know that there are optional taxes they are choosing to pay by saving in 401Ks and IRAs. It’s not the savers’ fault because they have been listening to “financial experts” that have told them to do this.

So, is your retirement savings safe from market risk and tax risk?

When we look at how to diversify someone’s retirement savings, we are going to give them diversification that protects them from market risk and tax risk. 

Here’s how. 

A portion of their assets will remain invested in the marketing and will be managed by our money managers. That means every minute the market is open our clients’ money is being watched. This gives our clients above-average returns without unnecessary risk.

Then, we look at putting a portion of the assets into an indexed annuity that gives all of the upside potential of the market without any of the risk.

That means when the market goes up 20%, so does the value of the annuity. But when the market goes down -40%, our clients don’t lose a dime. The money that has been put into the annuity plus what has grown inside of it is protected from loss.

A couple of things to note on the annuities we generally recommend:

  • The growth is not limited.
  • The fees are in line with all the other financial assets. Variable annuities do have high fees, but we don’t work with those.
  • You do have access to a portion of your money if you need it early on.
  • We can guarantee an income for the rest of your life, and your spouse’s.
  • Some of our annuities have averaged 12% to 14% a year for the last ten years, all without any market risk.

Having a portion of your retirement savings in an annuity can ensure that when the market drops, and it will, that you have a portion of your retirement savings that will not drop in value.

That’s one way we help people diversify, truly protecting them from market risk with annuities that give great returns. 

When it comes to diversifying against tax risk there are two methods we use. The first are Roth conversions to Roth IRAs. This is not a new concept, but it takes some of your taxable money and makes it tax-free. We do this strategically to not increase your taxes now when you take the money out of your qualified accounts [401Ks and IRAs] and give you tax-free income later on. 

The other way we do this is by using 7702 plans. These give the same tax-free benefits as a Roth account, but they have no market risk, like the annuities.

Utilizing this strategy generally gives someone 40% to 60% more income in retirement than if they left the money in their 401K or IRA. You get that much more income from not having to pay any taxes and no market risk.

That’s what diversification means to us. Protecting our clients from market risk and tax risk. Also, by laddering our client’s retirement savings in these ways we help them establish an income plan for retirement which is far more important than the actual amount of money someone has saved.

Having a large nest egg as the mainstream media says is not what is most important. Having an income plan that gives you the most income for as long as you need it is most important.

Protecting your money from market and tax risk will give you a secure income plan that will give you all the options you need in retirement. 

By doing all that I’ve discussed here we were recently able to help a couple, both 60 years old, get rid of the unnecessary market and tax risk and establish an income plan that they won’t outlive.

To see if you qualify for this kind of planning contact me at 615.975.8677 or email me at c.carlton@bothhandsfg.com. If you work with another one of our agents I will still be happy to visit with you.

ABOUT THE AUTHOR: Cory Carlton is a co-founder of Both Hands Financial Group. He focuses on creating a predictable income stream in retirement for our clients. By using a combination of insurance and investments we are able to give our clients certainty in their retirement regardless of what happens in the world. Cory likes to give his clients options in their retirement and being properly diversified helps people achieve their goals. Cory enjoys spending time with his wife, Emily, and their three daughters. They spend a lot of time enjoying nature, going on hikes, and woodworking projects.