Money Talks: The power of tax deferral

As our friends from the north slowly migrate back to the rigors of life away from paradise, there are plenty of geopolitical events evolving to occupy their thoughts as we continue watch this incredible stock market run. Yes, many retired investors harbor great concern as to the future health and well-being of their investments; and rightfully so.

There are numerous concerns and general fear issues when to comes to retired investors and the safety and maintenance of their portfolio. The ability to successful build, preserve and protect their assets have become propriety one for many as we sit squarely in the cross hairs of an unprecedented bull market run in the history of modern investing. Each passing day takes investors ever higher in the amusement park thrill ride known as the stock market.

As investors embrace the diversification of alternative investments within their portfolio many are still unsure how to proceed. The diversification objectives fall into two categories; reduce risk and increase return. The term “meaningful growth” comes to mind. Now, certainly “meaningful growth” has a different definition for each investor. However, generally speaking, the ability to generate meaningful growth hinges on the basis of total return after taxes and inflation. Deferring taxable events can be a game changer.

Clearly many are convinced that the stock market has accomplished this over the last seven years, however still lost on most is the fact that while a 100 percent return sounds good, at the same time the 100 percent return is necessary in order to recover from the last market crash of roughly 50 percent. Consider the math; when a $100,000 portfolio loses 50 percent, the value goes to $50,000. At this point the portfolio will require a 100 percent return in order the grow the $50,000 back to the original $100,000. Fast forward to 2017 and we find many retired investors falling into a false sense of complacency, which should be expected.

Many have seen the light in an effort to truly diversify their assets among holdings other than stocks and bonds. Many have turned to the predictability and safety that comes with an insured index portfolio. There are a number of factors contributing to this predictability and safety. The first and perhaps most critical is the ability to avoid any and all stock market risk while enjoying stock market based growth along the way. While only a percentage of stock market growth can be expected, the ability to maintain those gains along the way is tantamount for success.

Another little known benefit from the insured index strategy is the ability to grow the asset tax deferred, just like and IRA. Yes, the insured index strategy allows investors to make unlimited contributions to the strategy and take advantage of the tax deferred growth, lending the acronym “URA”, or Unlimited Retirement Account. Although not an official compliance approved name for these accounts, the reality is that the power of tax deferral on these non-IRA accounts cannot be overstated

Many retired investors continue to put road blocks in front of their portfolios health all in the name of misinterpretation and misinformation. Some create an obstacle by thinking it is better to pay taxes along the way as we have no idea of where taxes may go in the future. This is perhaps the most myopic and completely convoluted rationale keeping investors from enjoying this proven, insured strategy. Consider the math; a $100,000 investment over 10 years earning 10% per year grows to roughly $260,000 tax deferred versus approximately $200,000 taxable at a median tax bracket of 28%. (See your IRA accounts as a percentage of overall assets.)

Again, keeping in mind that for the majority of retired investors, their IRA’s account for the majority of their life savings. There is no denying the compounding effect and accelerated growth associated with tax deferral. Deferring taxes is a powerful tool for compounded growth for any portfolio.

Now that we can safely put this flawed thinking out to pasture, clearly the ability for alternative investments such as insured index portfolios combined with the power of managed futures to reduce risk and increase return certainly allows for the life of a SWAN, sleep well at night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.