Retirement Strategies to Beat the Fiscal Cliff…

DANNY HARLOW OF NW TAX & WEALTH ADVISORY GROUP, INC., GIVES RETIREES STRATEGIES TO BEAT THE FISCAL CLIFF AND CONQUER WHAT HE PREDICTS TO BE A FISCAL CANYON

Danny HarlowHaving spent 39 years in his career, Danny Harlow knows better than most that “nothing is certain but death and taxes.” And he believes it is inevitable that taxes will increase. While many retirement planners tout the benefits of various products and investment vehicles to protect retirement funds, Harlow believes the true test of a retirement portfolio is how it well it will perform under the heavy onslaught of the government.

The Fiscal Cliff issues that concerned financial analysts throughout 2012 are far from solved. In January 2013, President Obama signed off on the first major tax increase since the early 1990s, boosting the top marginal rate to 39.6 percent on Americans with income over $400,000. High earners are set to pay 20 percent on income from capital gains and dividends while qualifying for fewer deductions. Harlow believes we aren’t just staring down a cliff – if we look up, we’ll see something that looks more like the Grand Canyon.

“Taxes are going to rise for everyone, because somehow we have to pay our way out of this deficit and it’s going to affect every American. We’ve got a big problem, and we’ll all have to pull together and pay our fair share of it, from the wealthy down to the middle class,” he says. Danny Harlow is President of the NW Tax & Wealth Advisory Group, Inc., a comprehensive financial and tax planning firm with offices in Vancouver, Washington, and Clackamas, Oregon. As a preservation and income specialist, he has more than a few ideas on how retirees can avoid going over the edge.

Harlow’s strategies for ensuring lifetime incomes for his retired and retiring clients hinge on what is taxable and what isn’t. “What’s really important for people to consider is how to get their money out of the taxable arena,” he says. There are only a few ways to do that entirely, one being the Roth IRA – which allows its holder to take money out income tax-free. When one client asked Harlow about gold, he replied, “It’s a good investment, but I wouldn’t put much into it now, since it’s at an all-time high. I’ll tell you what’s better than gold: tax-free money in the future. When taxes increase and you have a tax-free income stream, you’ll be very, very happy.” Developing plans to make his clients “very, very happy” is Harlow’s specialty, and tax analysis is a key component when combined with investments and annuities.

“I guarantee you, every person in Congress is buying a boatload of life insurance right now,” Harlow says, pointing out a significant tax strategy.  He suggests looking into using life insurance to “leave money behind, income tax-free,” and urges retirees to take advantage of free consultations when they’re offered to learn how to pass money on to the next generation in the most tax-advantageous way possible. Life insurance can also be used to provide for surviving spouses: “Let’s say a couple doesn’t need all their Social Security money or their IRA income. We can put a portion of that into a ‘second-to-die’ policy where the insurance companies underwrite the healthier of the two. The surviving spouse can get $3,000 a year for a $100,000 policy, then leave that income tax-free money to their kids and still have another $100,000 they can donate to charity.” He says even 80-year-olds can benefit from life insurance, since “sometimes it makes sense for the way they leave the money behind.”

The worst asset to leave behind, according to Harlow, is an IRA. “It’s 100 percent taxable,” he says, adding “When you leave qualified money, IRAs and 401Ks, behind to a non-spouse, there are some really strict rules you must follow if you want to minimize taxes. You can stretch an inherited IRA, but you can also leave that same amount of money to a person totally income tax-free,” he says.

After 39 years, Harlow is well versed on issues and problems few other advisors mention to their clients. His son, Chris, who just joined the firm, is also exceptionally knowledgeable about tax laws and strategies, having spent ten years as an IRS auditor. As registered investment advisors and tax advisors, NW Tax & Wealth Advisory Group, Inc., is uniquely prepared to help clients stay on top of both fiscal cliffs and canyons, as the case may be.

Few financial advisors take taxes into account when putting together strategies and portfolios, but as Harlow’s clients often tell him, he’s “married taxes, retirement, and income planning all together in one location.” According to Harlow, these are all connected and need to be integrated to work together, each strategy supporting the others. He says, “The tax planning aspect is so important in retirement,” but that isn’t all they do at NW Tax & Wealth Advisory Group, Inc. They also have an attorney for wills and trusts, as well as a long-term care and Medicare planner – creating a “one-stop shop” that allows him to keep track of everything under one roof.

One of the first things Harlow does is to look at his clients’ tax returns, scanning down the page to look for specific line items which he might be able to reduce in order to lower their tax bill. Considering that 85 percent of Social Security is subject to taxation, the savings can quickly add up. “People are surprised at the taxes they have to pay on Social Security. Husbands and wives combined often have $30,000 to $40,000 per year of Social Security income, and most of that figure is subject to taxation,” he says.

Too often he doesn’t see the tax return in time to reduce taxes, since most people only think of taxes at the beginning of the new year. “People would love to reduce their taxes, but nobody tells them how. They’re always finding out when it’s too late – what they could have done,” he says. But a tax planner should be in communication with clients throughout the year, not just at the beginning of the new year. Seeing tax planners in the last quarter of the year and having them do a tax prediction on your return is critical, Harlow says, since they “can catch things, before it’s too late.” Techniques as simple as “come in any time before the end of the year” can be the first easy step toward planning a successful retirement, especially if more of Harlow’s predictions come to pass.

“I predict there will be a potential limitation on 401Ks and tax-deductible products,” Harlow says, with the potential of the government limiting interest deductions on homes and deductions for charitable donations. And, “There are already limitations on other things that I think could very well expand. One hundred percent of Social Security could become subject to income tax in the future,” he says. Harlow deals both with states that have income tax and states that don’t; but everyone has to pay federal tax. When he sees clients under 70-years-old come in with tax returns that show zero taxable income, he points them in the direction of Roth IRAs: “What a perfect time to investigate Roth conversions!”

But more people come in asking about Social Security than Roth IRAs, which makes sense since the Baby Boomers are entering their 60s by the thousands every day. In fact, one of his most frequently asked questions is “When should I take Social Security?” In answer, Harlow offers an entire seminar just on Social Security techniques. He says there are multiple strategies that few people know about. “Let’s say the husband is at the full Social Security age of 66, but the wife is 62. And let’s say the husband has $2,500 per month of Social Security coming, and the wife only has $1,500 coming. He can file under his Social Security and receive at least half, and when she’s 66, she can file for her own and get a raise. The husband can also file and suspend, which allows the spouse to get at least half,” he says. For those who take their Social Security at age 66 and can afford not to spend it, Harlow suggests investing and saving it, “Then pay it back and start receiving a higher number at 70. The advantage here is to the surviving spouse. The highest income earner in Social Security should put off as long as possible when they receive their benefits in order to secure more income.”

In addition to Social Security planning, Harlow helps his clients create plans that act as private pensions, guaranteeing income for life. He says the product of choice for these types of strategies used to be bonds, the “teeter-totter of interest rates.” But now, with interest rates at historic lows, bonds may be too risky. Interest rates will very likely go up, and those with bond portfolios will be “in a bad situation” when they do, he says.

Pension-like plans are based on avoiding risk. As Harlow says, “You don’t come to NW Tax & Wealth Advisory Group, Inc., to grow your money; you come to preserve it and pass it on to the next generation in the most tax-efficient manner. If you’re here to figure out how to maximize your income and legacy, that’s what we do.” While taxes are a vitally important and often overlooked aspect of income planning, he says “Preparing for health care costs and estate planning tend to also escape notice. Many women who come in are focused on leaving as much as possible to their children and grandchildren, and many men have their eyes on fast cars and sleek boats.” Harlow’s plans, as safe as they are, can accommodate both while laying a foundation to deal with unexpected circumstances as well.

One unexpected circumstance retirees suffer from isn’t the result of illness or injury – it’s the hidden costs and fees in their portfolios. “When people come in to see me, they’re often in the dark about the costs they are paying on their portfolios. I give them ‘the rest of the story’ about what they’re actually doing. Their financial advisors only talk about features and benefits,” he says. These fees can severely diminish the payout on portfolios, causing some to not even keep up with inflation. For a similar reason, Harlow refuses to sell mutual funds, considering them one of the “most costly investments you could ever own, and people don’t know it. Only owners are notified of costs and changes, and you – as a participant in the pool – don’t know what you’re paying in fees. And if you’re dealing with a commission broker who’s charging an advisory fee while selling mutual funds, you’re being double-dipped.”

He says some of his clients get angry when presented with these unpleasant surprises and wonder what else they’re not being told. Harlow warns about variable annuities, also heavily loaded with fees. In fact, he’s seen clients pay more in fees than they take out for their living expenses, and “they’re stunned when they find out.” But those risks are out there now. They can be looked for and dealt with appropriately, which Harlow conscientiously does. However, it’s the unknown of the future that Harlow is especially guarded against. Taxes, inflation, rising interest rates, even another collapse of the market are all possible. Fortunately, you don’t need a crystal ball to know how to avoid them. You just need to know how to keep your money safe and your income steady, which, with tax-savvy strategies like Harlow’s, is possible under any circumstances.

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