Expert Interview with Jon Castle from Paragon Wealth Strategies LLC On Wealth Enhancement for New Retirees

In today’s uncertain economic climate, many new retirees are worried about outliving their pensions and retirement plans. In fact, 46% of investors in the United States are worried of running out of money in retirement, according to a Wells Fargo/Gallup survey from 2014. In light of an uncertain Social Security system, changing industries, and roller coaster interest rates, wealth enhancement is likely to play a major factor in tomorrow’s retirement plan. PARAGON Wealth Strategies has been helping worried investors weather the choppy economic waters since 2008 by offering a wide range of financial planning services from their team of Certified Financial Planners. We caught up with PARAGON Wealth Strategies’ Jon Castle to learn about wealth enhancement, and what it means for your retirement. Can you explain a bit of what wealth enhancement is, and how it differs from normal investment? By our definition, wealth enhancement consists of 3 primary objectives.

1. First, to continue to grow a client’s wealth within their risk tolerance.
2. Second, to generate income streams from the client or client family’s nest egg, generally in retirement.
3. Third, to mitigate taxes to the maximum degree possible – thus “enhancing” the client’s wealth as much as possible.

This third component may have little to do with investing at all; instead, it may involve strategically using tax brackets and government timelines to one’s advantage. An example would be for a client to perform Roth conversions (in measured amounts) during the period immediately following retirement, when they would likely be in a lower tax bracket – but before they must take required minimum distributions (RMDs) from their IRAs and 401(k)s after age 70½. In this manner, they reduce the overall size of their qualified accounts – which, if they are large, may have RMDs that are sizable enough to cause them to jump tax brackets. Given the uncertain future of the Social Security program, is wealth enhancement going to be vital to a sturdy retirement plan in the near future? Our belief is that while the future of Social Security is “uncertain,” we believe that Social Security will not cease to exist, needed changes will likely be phased in over time, and Baby Boomers will be grandfathered into current benefits. It can be helpful to remember that Social Security was never meant to be a complete “Retirement Program.” It is called OASDI – Old Age, Survivors, and Disability Insurance. As such, proper retirement planning, saving, and investing will be necessary for anyone who does not have a strong pension or desires to have a lifestyle in retirement that allows for fun, enjoyment, a safe place to live, and high quality medical care. Wealth enhancement is merely taking retirement planning to a higher level using a higher level of knowledge and skill to achieve the optimal results that, in our experience, individuals without advisors rarely achieve because they do not understand the complex strategies involved. What are a few of your favorite resources for wealth enhancement? Where do you look for solid, dependable investments? The creation and maintenance of a properly designed portfolio is certainly a component of wealth enhancement. Generally, PARAGON will use ultra-low cost ETFs or institutional, no-load mutual funds to design portfolios in accordance with Modern Portfolio Theory. The intent of Modern Portfolio Theory is to design a portfolio in which the dissimilar price movements of different asset classes combine to create returns greater than the sum of the parts of the portfolio. In most cases, index funds or ETFs will serve this purpose quite well; but we do seek Alpha (outperformance) in specific opportunistic sectors (such as health care or real estate), in fixed-income classes, and in international asset classes by carefully choosing mutual funds that meet our criteria. Therefore, a PARAGON portfolio will typically consist of ETFs; several mutual funds for sector, international, or fixed-income exposure; and, if the portfolio is large enough to justify it, a diversified subportfolio of individual investment grade corporate bonds. Generally, Morningstar, Litman Gregory, and Standard and Poors provide us with adequate data for ETFs and mutual funds, while we seek the counsel of a private bond specialist for individual bond holdings. PARAGON Wealth Strategies offer their clients a Living Financial Plan, which is updated daily, to keep up with the current market. Can you give an example of some of the insights contained in the Living Financial Plan? A typical comprehensive financial plan created by PARAGON will be a fully interactive digital vault that aggregates all of the client’s financial asset data into one dashboard that the client can see. This dashboard, in turn, links to the main financial planning engine into which we have input the client’s financial goals and current “fact patterns” such as their assets, liabilities, income, and expenses. Based upon the asset classes held within the client accounts, the computer makes risk and return assumptions based upon all of the past data that exists for each asset class. This allows us to create the “main scenario” which illustrates the most likely outcome for the client if they continue upon their present path. The system also allows us to create multiple alternate scenarios for comparison, such as, “What if I sell my house and downsize?” or “What if I take Social Security at age 66 instead of age 62?” The outcome of each scenario is illustrated which allows the client to make the most informed decision – TODAY – that will affect their living outcome in the future. How important is it for a successful and sturdy retirement plan to keep up with the market? Moderately so. It is helpful to know things such as when interest rates rise, bonds struggle to create positive returns; and when we are in a recession, the stock market tends to correct greater than 20%. But daily market fluctuations are generally irrelevant to the successful investing over the long-term. What have been some recent market influences that have been making waves? What effect do you propose these changes will have ultimately? A significant market influence that is currently in play is the Fed’s indication that it will raise interest rates before the end of the year. Since the market price of existing bonds will fall as interest rates rise, then it makes sense that fixed-income portfolios will struggle to generate healthy returns. The last time interest rates were as low as they currently are was 1952; and the return on bonds over the following decade was about 2% annually. It is not unreasonable to assume that we will see similar returns going forward – at least until the next recession, when the Fed will probably lower interest rates somewhat. So, a savvy investor will likely reduce the interest rate sensitivity (duration) of their bond holdings and be prepared to take more credit risk in order to seek more return. Unfortunately, increasing credit risk also increases the correlation of the bond portfolio’s price movement with the stock market; so portfolios tend to be more volatile during rising interest rate environments. Historically, however, the stock market has delivered acceptable returns during those periods. For people looking to enhance their wealth but who have not yet hired a dedicated company to do so, what are some basic steps they can undertake to get started with wealth enhancement? Basic investing and accumulating assets can certainly be done on one’s own. However, as an investor approaches retirement or accumulates considerable assets (say, over $500,000 to $1 million), then things change and can get really complex really fast. I would say that fewer than one out of 10 people we see really have a good handle on successful retirement strategies which include Social Security, Medicare and medical supplements, incapacity planning, survivor planning, retirement income planning, and tax planning through their retirement years. Additionally, one’s ability to understand and remember complex financial concepts tends to begin to decline right around retirement age. So, individuals should seek out an advisor that they trust, that they enjoy being around, whose philosophy they agree with, and who is a bit younger than they are – and start working with them. While we are seeking new clients, we certainly aren’t for everyone and don’t seek to be. Your advisor should be your success partner, so pick carefully. 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