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Engineering Your Wealth….Takes a Methodical Approach!

David Gagnon

The probability of achieving your life’s financial goals can be a direct result of how efficiently you manage your financial resources such as savings and investments including expenses, debt and cash flow along the way.

There are many moving financial pieces to a comprehensive financial planning puzzle as it relates to savings, investments, taxes, capital purchases (auto, appliances, college funding, etc), personal debt, and mortgages— to name a few. How each asset or liability is handled could either have a negative or positive impact on future financial goals. Assessing inefficiencies or identifying opportunities is best accomplished by taking a 30,000 foot view of how your present position of assets, liabilities and cash flow are being managed.

A common approach to traditional planning is to focus primarily on the accumulation of assets, and achieving the highest yields, with no regard to how other areas of one’s finances, such as taxes and debt, may adversely affect the overall financial results. For instance, receiving a gross rate of return on your investment of 12% might be impressive but that isn’t the important number. It’s what you get to keep, after taxes and fees, which is important! The money that is truly yours is what is most important. The portion that you didn’t get to keep can be labeled as a “wealth transfer” that was in the form of taxes and fees. If a strategy could be implemented, utilizing the optimum financial product, that may reduce these taxes and fees, then these reduced “wealth transfers” would be real dollars saved and could be redirected towards your financial planning goals.

This is just one of many types of “wealth transfers” that could significantly diminish financial success and benefits over a lifetime. There are many ways where we can end up transferring wealth unknowingly and unnecessarily. Taxes, non-deductible debt payments, credit cards, car payments, mortgages, and how you fund your pension plan are just a short list of financial vulnerabilities. Unfortunately, individuals and financial advisors commonly overlook many of these costly oversights by focusing only on accumulating money and trying to achieve the highest yields possible.

Minimizing wealth transfers that occur unknowingly and unnecessarily can improve the probability of financial success. An example of a “wealth transfer” is paying a dollar in tax that you did not have to pay if you had employed a legal strategy not to pay it. This “wealth transfer” is only part of the equation of the cost associated with this lost money. A much greater component of this “wealth transfer” is the “lost opportunity cost” associated with it. The definition of “lost opportunity cost” (LOC) translates to, “If you lose a dollar you did not have to give away, such as taxes paid unnecessarily, you not only lose that dollar but what the dollar could have earned for you had you been able to keep it.” The value of the wealth transfer plus the associated LOC when compounded over one’s lifetime, and beyond to subsequent generations, can be a substantial loss of money that could amount to millions.

Engineering your wealth should entail a comprehensive approach that effectively identifies and explores the negative impact of wealth transfers and identifies strategies to reduce or help avoid them. The strategies during your “accumulation” years prior to retirement may be different than the strategies during your “distribution” years during retirement. During either stage of the financial timeline it is important to minimize the potential wealth transfers that may occur unknowingly and unnecessarily.

Some common “wealth transfers” that occur frequently for many people are:

  • Compounding interest in taxable investments
  • Term insurance premiums
  • Non-deductible debt payments
  • Prepaying mortgage principal
  • Large down payment on the purchase of a home
  • Paying cash for a house
  • Qualified plan contributions above the company match

The scope of this article does not allow for a detailed explanation of each common wealth transfer noted above so a brief example of “compounding interest in taxable investments” will be provided. One of the largest areas of wealth transfers is the payment of taxes created by the compounding of interest in taxable accounts.

Investors seeking higher rates of returns often act without a clear understanding of the potential results of their actions (the potential for both gain and for loss). We very often credit our gains to the miracle of compound interest, sometimes referred to as “the eighth wonder of the world.” Interest applied to the initial investment compounds as it is reinvested and accumulates in the same account. Growth in the account can be dramatic. Unfortunately, this same magic has a dark side called increasing tax. Each year annual interest gains will be subject to federal taxation and also potential state taxation if it applies, as not all states impose a tax on this type of income.

To what extent can taxes affect long-term finances? For example, let’s assume $10,000 is invested annually for 30 years at a yield of 6% with an annual tax rate of 25%. In 30 years the total amount invested was $300,000 and the account value after taxes paid was $637,524. Cumulative taxes paid amounted to $112,508. There comes a time when annual taxes exceed the annual deposit. In this example, the tax cost in year 30 is $9,151 whereas the deposit was $10,000. At some point, the problem here manifests itself. Most often, that occurs because we pay our taxes out of our lifestyle funds and not out of the investment itself. Like millions of investors you suddenly find that your lifestyle can’t afford these constantly escalating taxes. As a result, you may be forced to reduce your investment savings or pay the taxes out of current earnings. Once this happens you will fall short of having the amount you thought necessary at the end of your journey. Either alternative undermines your long-term financial goals.

In addition to taxes paid there were cumulative “lost opportunity costs” on taxes paid totaling $87,985 (amount that could have been earned on lost tax dollars at 6% over 30 years). As a result, the “total wealth transferred” was $200,493 ($112,508 + $87,985). This is astonishing as it comprises more than two-thirds of the total dollars invested! The fact is the “lost opportunity cost” will continue to compound beyond one’s lifetime and into infinity. Think about the value to one’s financial goals during their lifetime and future generations if these taxes (wealth transfers) could have been significantly reduced or eliminated.

Most investors, or advisors, don’t pay much attention or analyze taxes on an account-by- account or investment-by-investment basis. They simply lump them together and write a check for the bottom line tax due. By paying taxes in this manner it is easy to miss the impact any one investment decision has on your nest egg or financial goals.

You can help achieve your full wealth potential when you have the knowledge to identify the best financial strategies that are fueled by the optimum financial products. Ultimately the goal is to minimize risks, taxes, fees and maximize yield, liquidity, use and control of your money with the goal of minimizing “wealth transfers.” Uncovering opportunities isn’t primarily accomplished through investments or products but through sound management techniques. To develop a new perspective of your true wealth potential will likely require the need to think outside the box and adopt “unconventional planning” approaches and strategies.

Increasing financial wisdom will allow for a clear and simple understanding of the impact and long-term effects of day-to-day financial decisions. It doesn’t necessarily matter where you are financially today. It only matters that you thoroughly analyze your current assets, debts and cash flow to determine how to capitalize on opportunities to help be more efficient financially and minimize wealth transfers that occur unknowingly and unnecessarily.

Engaging the services of an experienced tax and financial advisor can be a smart choice when seeking to help acquire the knowledge and identify the ideal financial tools necessary to design a “Wealth Plan” engineered for more efficiency. Ideally your advisor’s planning approach should be a comprehensive evaluation of all components that impact your finances such as investments, debts, cash flow and tax planning. In my opinion, Advisors that are independently licensed in both securities, investment advisory, and insurance products, that also have a working knowledge of the tax code, will have the greatest flexibility to develop a plan that is objective and likely optimized with financial products best suited for your personal goals and objectives.

It does take time, energy and effort to design and engineer a highly efficient “Wealth Plan.” When you receive the proper guidance, knowledge and stay committed to the process, you gain a wealth-building process to help you achieve your long-term goals while at the same time increasing your day-to-day cash flow and, very possibly, enriching your current lifestyle. Your advisor should be able to quantify and validate the benefits of any proposed strategies so you can better assess the value of your options and the decisions you need to make.

Minimizing or eliminating wealth transfers that occur unknowingly and unnecessarily may provide the greatest benefit and opportunity to “engineering wealth” that may provide a higher probability of achieving financial success. Quite frankly there may be more to gain by avoiding the losses than picking the winners! And this can be accomplished without taking any additional risk.


Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. First Financial Planners and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.


About the Author:

David Gagnon is the founder of First Financial Planners. He has been advising individuals and business owners for the past 33 years. He is a licensed CPA and also holds the titles of Registered Financial Consultant (RFC), Certified Fund Specialist (CFS), and Certified College Advisor (CCA), awarded to financial planners who have demonstrated competency in education, licensing and tenure in the financial planning field.

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