Paying Taxes Isn’t Necessarily Bad
So, paying taxes isn’t bad? You have got to be kidding – right? No, we are not. You only pay taxes if you MAKE money and making money isn’t a bad thing, but the consequence is paying taxes when you sell. Okay, so all one must do is never sell a good stock, therefore no taxes and the world will be great. Right? Maybe, but more likely than not, it will not be the case for a healthy portfolio. But, before we get to some examples, let’s talk about how to construct a healthy portfolio.
First and foremost, you need to figure out how much risk you are willing/need to take and your time horizon. Then, you must articulate the financial goals you wish to achieve. What return do you need to meet your financial goals? From there, you tailor a mixture of stocks (small, mid and large cap, domestic and foreign), bonds (taxable or tax free, government or corporate), real estate (hard asset, REIT), commodities (oil, copper, gold, silver), alternative investments (private credit, private equity), and cash to have a good shot at the return you need with the least amount of risk to potentially achieve it.
For purposes of our example, we are going to make it simple – we are going to have a portfolio of 50% stocks, 30% bonds, 10% real estate, and 10% cash. At the end of one year, some will go up and some will likely go down. Let’s suppose that the ratio is now 60% in stocks, 20% in bonds, 12% in real estate, and 8% in cash. Obviously, the result heading into the second year is much riskier than it was in the first year.
It is time to rebalance the portfolio. It means you need to sell some of your winners, those that went up in value, to buy your losers, those that went down in actual or relative value. Sounds counter intuitive until you realize you are selling high and buying low. What a concept! Selling high and buying low. Oh, gosh, I had to sell, that means I had to pay taxes. Think of taxes as the premium you pay for an insurance policy that protects against increasing risks. Now taxes sort of make sense and play a vital role in effectively managing a portfolio.
That is at the portfolio level, but what about an individual stock in the portfolio? Let’s say your stock portfolio, which was put together on January 2, 2020, was made up of five diversified stocks in which you invested $10,000 for a balanced portfolio. You are a buy and hold investor because you don’t want to pay taxes. You wanted to control risk, but by avoiding taxes you may increase risk. Today, utility stock A is worth $40,000, consumer staple stock B is worth $50,000, international stock C is worth $25,000, real estate stock D is worth $45,000, and tech stock E is worth $5,327,180. Do you think the risk level is too high with 97% invested into one stock? Who wouldn’t love it? But the risk is over the top. Prudence would have been to sell some of your big winner along the way because of the risk you had. Imagine if that tech stock “only” declined 10%, you would have lost over half of one million dollars. How would that risk feel? Well now you are retired and you need cash flow. We have no choice but to sell and pay taxes and we should do so.
Next, you work for a company that has a stock purchase plan. You also may have stock options. in your 401(k). Together this represents 40% of your investable net worth. You love the company you have worked for over the past 40 years, and you just know it is going to continue to be great during your retirement. But the stock doesn’t know you are retired and the management team has long forgotten about you. Great companies don’t always remain great companies. Companies named Blockbuster, Toys R Us, or Kodak disappeared. Could your company become nonexistent too? Yes. You need to sell some company stock to protect yourself because in retirement you can’t get it back. You don’t have to sell all of it, just reduce your exposure in a significant way over time. The easy thing to do in this case is at least sell in the 401(k) plan where there is no tax consequence.
Paying taxes is the price we pay for investing wisely by deciding to sell the winners from time to time to buy what we believe to be the next great investment.
Interest Rates Stay the Same
About two weeks have passed since the Federal Reserve’s Open Market Committee met and held interest rates steady, at least for now. The Fed’s commentary was very short with only about 130 words, down from a normal 350-400 words. New Chair Kevin Warsh feels that less is better which is the first major change in the Fed with likely more to come.
Is SpaceX Really Worth $2+ Trillion?
We will be the first to admit that a company is worth what investors are willing to pay for it. But is SpaceX worth it by normal valuation standards? SpaceX has never produced any profits. In fact, it lost $4.9 billion in its last fiscal year and $1.9 billion in the first quarter of this year. Thus, it pays no dividend. It sold at the IPO for a price of $135 per share or about 100 times revenue, while the average for the S&P 500 is about 3.5 times.
The public float on the stock was only about 4-5% of the stock even with it being the largest IPO in history by far. Musk controls about 85% of the stock and maybe even a higher percentage of the voting stock. The FTSE Russell and NASDAQ have modified their rules to include it in their respective indexes much sooner than normal. On the other hand, the S&P 500 decided against including SpaceX in their index, so there will likely be some confusion between the different indexes as a result.
Fraud Scams Worse Than Ever
The CFP Board of Standards recently released “Don’t Fall for It: Guarding Against Financial Fraud” which found that 62% of Americans have experienced financial fraud or have known someone who has in the past three years. While 37% were sure they could spot a fraudster, we really question whether the number is that high as the scams have become ever more sophisticated with the advent of AI and its ability with fake voice and tone, deepfakes, fake websites. About 30% had the courage to admit they probably would not recognize it. The FBI says the total cost in 2025 was $20.9 billion or about $4 billion more than in 2024. Though older Americans are more vulnerable, younger folks are scammed more but usually in smaller amounts. Out of embarrass-ment, many victims never report the crime, so the results could be much higher. Buyer beware!
Is Running Out of Money Really the Problem?
When making a retirement plan, one of the tools that we use is a Monte Carlo analysis that helps us determine the potential success of the plan. It is a statistical program that makes about 1,000 iterations of investment returns. Often, we hear other planners talk about “the success of not running out of money” when using a Monte Carlo analysis. While that is one way of interpreting the results, we prefer to say, “the success rate of maintaining your lifestyle in retirement.” The truth is that very few people run out of money. When they don’t get the returns anticipated, excess expenses develop for healthcare, or inflation is greater than expected, they cut back on variable expenses like an extra vacation, membership at a country club, or perhaps sell the home they love and downsize. All of these are about a diminishing lifestyle.
But there is another issue. It is not unusual for people to ask us what the hardest part is of being a financial planner. Is it when the market goes down? When are interest rates too low or high? Maybe, it is when a negative event occurs in a client’s personal life? All of these are stressful times, but they are not the hardest. The hardest thing is convincing clients that it is okay to spend their money.
After spending a lifetime saving and investing wisely, we all worry about running out of money, but is it reality? For most clients, their Monte Carlo analysis puts them well into the 80% range of success and several are fortunate enough to be in the 90% range. According to a study published by the Employee Benefit Research Institute, about 33% of all retirees still have most if not all their investment value still intact into their 80s. Yes, some are overconfident early in retirement about investment returns, or spending more than they should, and this leads to issues for 10-15 years in the future, but many don’t spend all they safely could. Thus, their retirement lifestyle isn’t what it could be.
If we all knew when we were going to die, we could plan for it. Since we can’t, we must plan for the unknown and that often creates enough fear that people will not spend what they could to turn those golden years into platinum years. One of the benefits of working with ProVise is obtaining financial confidence to fulfill your dreams and using the Monte Carlo analysis as a tool. The general rule of thumb is that you can draw 4% of your assets each year and live a lifetime of no financial worry. But you know what? Occasionally, it is okay to spend more. This is why our tag line is “financial planning for your life and lifestyle.”
Yes, convincing people it is okay to spend their money is the hardest part of being a financial planner.
What is the Kiddie Tax?
Thinking about giving money or investments to your kids or grandkids? It’s worth pausing first to consider a possible tax surprise. The “kiddie tax” can apply, meaning that certain income in a child’s name is taxed at the parents’ rate instead of the child’s, sometimes leading to a bigger tax bill than anticipated.
Consider a grandparent who transfers $40,000 of appreciated mutual fund shares to their 19-year-old granddaughter to help cover college costs. The grandparent expects that because their granddaughter has little to no income, she’ll be able to sell the shares tax-free under the 0% long-term capital gains bracket.
However, this assumption overlooks the kiddie tax rules. Since the granddaughter is under age 24 and a full-time student, any investment income above the exemption is taxed at her parents’ rate, not her own. If the parents are in, a 15% capital gains bracket, for instance, that same rate applies to her.
As a result, rather than paying no tax, the daughter could face a tax bill of several thousand dollars on the sale, diminishing the intended benefit of the gift. It’s important to evaluate these potential outcomes before transferring assets to a younger generation.
Can the Fed Influence Mortgage Rates?
A common misconception among Americans is that the Federal Reserve directly sets the interest rate people pay on new mortgages. In its last policy meeting, the Fed projected a 0.25% increase for the Federal Funds rate by the end of this year – but could that push mortgage rates up by the same 0.25% if the Fed increases rates by year end?
The Federal Funds rate is the short-term interest rate that banks lend and borrow from one another overnight, and it can make short-term borrowing costs cheaper or more expensive for banks, which in turn makes borrowing cheaper or more expensive for consumers. If the Fed increased its policy rate by 0.25%, that doesn’t mean mortgage rates would rise automatically by the same amount – though the two tend to move in the same direction.
The Fed can also use other tools besides the Fed Funds rate to influence mortgage rates, such as buying and selling Treasury bonds or mortgage-backed securities. For example, to support the economy during the pandemic, the Fed purchased Treasuries and mortgage-backed securities and lowered its policy rate to a range of 0.00% – 0.25%. Mortgage rates dropped too and eventually reached the lowest levels ever recorded in 2021. While many Americans locked in a mortgage rate near 3% then, the Fed’s policy projections do not signal that mortgage rates will return to those record low levels anytime soon. The bottom line is that the Fed does not directly set mortgage rates, but it can influence them.
Up Your Assets™
Episode 34: Sold My Company. Now What the Hell Do I Do?
In this episode, join Jerome Myers and host Ray Ferrara, CFP®, as they study the emotional and psychological challenges business founders face and how to plan for a successful transition that aligns with personal purpose and fulfillment.
Most founders assume that “cashing out” their Company or Business means the hard part is over — but in reality, it’s just the start. The real challenge? Managing the identity and purpose shift, and planning for what’s next.
So, what’s the secret? Are you truly ready for your next mountain? Or just thinking about the summit? Climb on and listen today!
Acknowledgements and Important Disclosures
From the Up Your Assets website
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