As someone who works at a financial planning firm, and who spends much of his day helping create and improve financial plans, what I’m about to write may seem strange: plans are worthless, but planning is everything. Sound familiar? It probably should. It’s a quote by former president Dwight D. Eisenhower, recalling his experience as a staff officer in the lead-up to World War I. Some of his fellow officers, confident that America wouldn’t be pulled into a European war, tossed out their detailed military maps of the French countryside. It was far more likely, they decided, that the army would be fighting enemies in Kansas and Pennsylvania than France. Fortunately, the vicious and warlike Canadians never invaded. Unfortunately, many of those same officers soon found themselves in bloody trench warfare on the Western Front. Most of the cities, roads, and forts they fought for tooth and nail in 1918 were clearly labeled on the war plans they had discarded only years before. Eisenhower’s point was this: a plan can very easily fall apart when it encounters the unexpected or the unknown. You can make a plan to visit a city, or prepare dinner, but you cannot make a plan to fight an entire war, or to meet a future spouse. More variables introduce more uncertainty. In situations like these, the process of planning is far more important than the plan itself. The former president described it like this: “…if you haven’t been planning you can’t start to work, intelligently at least. That is the reason it is so important to plan, to keep yourselves steeped in the character of the problem you may one day be called upon to solve [emphasis mine].” Financial planning certainly isn’t as dangerous as the Western Front, but it still involves many unknowns. People change their minds about how much they’ll work and when they’ll stop working. Sometimes they have no choice in the… | Read More »
Author: Aaron Bauer
Roth may not be perfect for everyone
Like many, I have certain expectations of camping. Hard ground. Hot food. Cold drinks. The simple things in life. I certainly do not expect an eye-opening conversation about tax codes and retirement policies. So, when the topic came up this last weekend around a campfire, I was quite surprised. One of my friends, generally very astute, was convinced that there was no reason to invest in a traditional IRA. A Roth, she told us, was just plain better. Why pay taxes when you don’t have to? I tried to interject to give an even-handed comparison. “They are different plans,” I protested, “for different circumstances. Neither one is always better.” My friend ignored me. She continued. And I was amazed. A Roth, it turns out, is no mere retirement account. It can hold stock in Apple and Microsoft. It compounds in value every nanosecond. It’s gluten free. Bluetooth compatible. Standard and metric. Faster than a speeding bullet. My account is slightly exaggerated. Well, borderline untrue. Fine – a complete and utter fabrication. But hearing the way many people, my friend included, talk about Roths, it doesn’t seem all that far-fetched Let’s be clear: there are many advantages to a Roth. The funds can be withdrawn or transferred with relative ease. It is more flexible in estate planning. It is not subject to a required minimum distribution at age 70. And it can save money in the long run, depending on your tax situation. But that is the key: depending on your tax situation. Roth IRA contributions are included in your taxable income, while traditional IRA contributions reduce it. All else being equal, the person who uses a traditional IRA will be able to invest more in their plan than the person who uses a Roth IRA, because their tax load is lower. Assuming both plans are invested identically, with similar tax brackets in retirement, the traditional IRA will have exactly as… | Read More »