Author: Charlie Mattingly

Categories
Charlie Education

Plan and Prepare for the Unexpected: My Personal Lessons Learned from Hurricane Helene

As I write this article it was almost exactly one week ago that I drove through the night to pick up my daughter from Furman University in Greenville, SC. The evening before I left, my daughter and I chatted about her driving home from school since there was no power, and very little access to food or fuel.


Even after that conversation I wasn’t quite sure of the extent of the damage from Hurricane Helene in the western Carolinas. My daughter mentioned that she was going to make her way to a friend's house or a hotel in the Greenville area. However, the power was out at both places. There was literally nowhere to go to get food, water, or electricity. 


After that conversation, I realized my daughter wanted out of there and she might be crazy enough, like her dad, to start driving just to make something happen. I really wanted to get there before she decided to leave for home that Saturday morning. That is what really motivated me to get up at 2 AM and start my four-hour trip from Maryville, TN, to Greenville, SC. Interstate 40 from Tennessee to North Carolina had washed away in the flooding, so I took a famous path of mountainous roads called the Tail of the Dragon, aka Highway 129. I’m sure that stretch of highway is exciting under different circumstances and with a different vehicle than my Toyota 4-Runner!


I still didn’t know the full extent of the damage, but I knew there was a possibility of flooded roads, downed trees, closed roads, areas of no cell service and limited gas at gas stations. In fact, all of these conditions existed and more! The damage, especially to the Ashville, NC, area was far worse than I thought. Even now, the death toll is still rising, and there are ongoing search and rescue operations for missing individuals that live in remote and mountainous areas. 


After witnessing a small portion of the damage from Hurricane Helene, I’ve apologized to my Florida and other coastal living friends for my lack of empathy and understanding of the true devastation Hurricanes can inflict on communities and human lives. I’ve often read that knowing something to be true and having the experiential knowledge of that something is vastly different. I came to experience that principle firsthand after the short rescue operation of my daughter from college. Clearly, what I witnessed was just a fraction of what was happening to those who live in the areas affected by Hurricane Helene. 



Get a Plan and Change Your Mindset


What are some steps we can take to prepare for a catastrophic event of any kind? Catastrophic events happen in many different forms; disability, untimely death, loss of employment (see the latest news for Spirit Airlines). However, just like flight planning, having a plan in place for the unexpected can bring security, confidence, and reduced stress, but we must do the work. 


The most important part of any plan is to have the right mindset. I’ve certainly been guilty of a mindset of, “...that (hurricane, earthquake, tornado, etc.) only happens to other people and it won’t happen to me.” 


Furthermore, put aside the idea that you’ll be labeled a crazy prepper if you have a generator and fuel source in your basement. Get one asap!


As we have already discussed in this article, we don’t know what the next event will look like. We do know it will look very different from what we experienced in the past – remember 2020? Also, like you, I’m a bit skeptical of the electromagnetic pulse (EMP) grenade that your captain told you was going to happen soon, but you’ll be prepared for it anyway!



Create a “Go Bag”


One of our Leading Edge team members, Amelie, shared with us a time when they lived in an area in California prone to wildfires. She mentioned that they prepared a couple of duffel bags they could grab quickly and run out the door to escape the fires. The bags might contain the items below, but you may decide to include other items as necessary for your area. Click here to get more ideas from the California Department of Forestry and Fire Protection. 


• Cash! – more on that below
• Short supply of non-perishable food and water
• Maps with evacuation routes. (Like mine, your cell phone may not be the latest and greatest that still provides GPS directions without a Wi-Fi or cell phone signal.)


○ I learned after my trip that the iPhone 16 has satellite connectivity features that allow you to send and receive messages, request roadside assistance, and share your location when you don't have cellular or Wi-Fi coverage – That would have been nice!


• Necessary prescriptions or medications
• First aid kit and sanitation supplies
• Flashlight and battery-powered radio with extra batteries
• Copies of important documents; birth certificates, passports, etc


****Another one of our Leading Edge advisors, Mark, currently living in Asheville, said he was caught off guard by the almost immediate switch to an all-cash system. He also mentioned the long lines at the ATM machines made it very difficult to obtain cash if you didn’t already have it. Make sure to add cash to your “Go Bag” or your fireproof safe at home.



Financial Considerations for Preparing for Emergencies and Natural Disasters


1. Understand your homeowner’s insurance and what it covers. Replacement cost value is one of the most important elements in a home insurance policy. If your house is destroyed by a problem covered by the policy, your dwelling insurance policy pays to rebuild it.


• If your house costs more to replace than your coverage limit, you’d have to pay for some of the work yourself or reduce your rebuilding budget.


2. A standard homeowners insurance policy covers your home against wildfires, tornadoes, hurricanes, hail, and other common storms, but not flooding from bodies of water. 


Furthermore, if you have flood insurance, understand the difference between flood damage and water damage. Under the vast majority of homeowner’s insurance policies, flood damage is not considered a form of water damage. Since standard homeowners' insurance doesn’t cover flooding associated with hurricanes, storms and heavy rains, it’s important to have protection from the floods that often accompany these types of disasters and to understand how your insurance company defines a “flood.”


From Investopedia; You may need different types of insurance to mitigate disaster risks in your area. The precise types of insurance are region- and hazard-specific. The amount of coverage you will need can vary significantly depending on the location, the type of natural disasters prevalent, and home prices in your area.


Homeowners in hurricane-prone areas might need windstorm insurance, while others may require flood insurance.



Build a Robust Emergency Fund Using a Taxable Brokerage Account


In almost any emergency, whether it’s a natural disaster, personal disability or financial catastrophe, quick access to money without being penalized (I.e., IRAs, 401ks) can provide the most security and peace of mind. 


We love it when our clients put forth the extra effort to build a large savings balance in a taxable brokerage account. A taxable brokerage account is very flexible and can be used for any purpose from retirement to college to funds to pay for living expenses in case of a disability. 


You can use a brokerage account to purchase investments, such as stocks, bonds, mutual funds and ETFs. A brokerage account doesn't have limits on how much you can contribute or what you can do with the money.


We’ve seen the peace of mind and other emotional rewards pay off when someone has a healthy balance in their taxable brokerage account. For example, in 2020 when our world was turned upside down by the COVID 19 pandemic, many people dipped into their 401ks and withdrew large amounts or borrowed from them because of temporary government rules. Those that built a large savings balance had no need or desire to dip into their 401k in order to weather the COVID storm of 2020. I realize this is not always possible, as there were many brand new first officers that were furloughed or did not get hired as planned due to the pandemic.


Currently Spirit Airlines is considering filing for bankruptcy. A friend of ours at Spirit has absolutely zero debt and a very healthy emergency fund. Although losing his job at Spirit Airlines is a disturbing possibility, he and his family are not nearly as stressed as they would be without a strong balance sheet. 


Finally, catastrophes and emergencies come in many forms. Although it may not be practical to be prepared for every possible scenario, there are many steps we can take so that we can weather the inevitable storm with less stress and more peace of mind. And, like we are seeing in the areas affected by Hurricane Helene, if you are prepared then you can quickly be of service to your neighbors and your community and lend a helping hand like our Leading Edge teammate, Whitney. She is a resident of Inman, SC near Spartanburg and Greenville, SC. 


After a day in Charlotte, NC to avoid the worst of the storm they returned home to help in any way they could. At one point they were helping to coordinate helicopter airdrops in remote areas of the western Carolinas most affected. I’ll conclude this article with a few of her comments. She texted our team while she and her husband George were working with Operation Airdrop to help hurricane victims. 


From Whitney: 


“All is well here, just still very disconnected - no power, no hot water, no gas and VERY spotty cell service. Thankfully we had minimal damage to our house/property and by some miracle, George was home for all of it. (He’s an airline pilot) We spent Sunday night in CLT for a little moral boost (yay hot showers and wifi!) but there were several reports of looting near us so George didn't feel comfortable leaving the house unattended, so we headed back to the darkness on Monday morning!

The past two days have been incredible though. I've been working with an organization called Operation Airdrop coordinating helicopter drops into very remote areas! They had tons of helicopters and planes loaded with supplies but were having a hard time finding SXS (Side by sides) to help unload and distribute once they landed in these remote areas. I did what any good military/pilot wife would do (haha) and asked the Pilot Wives Facebook group if they knew anyone! Within 2 hours we were able to coordinate 2 drops full of medical supplies and food! Attaching one of the photos (see below) to this because how awesome are people! We have three more drops going out as we speak -- all coordinated via the Pilot Wives on FB! Wild.


They need pilots on the ground to help with OPS and flight planning, etc. so we are heading back to Concord this afternoon. George will be working with the flight operations team and the boys and I are loading supplies.

Also, if anyone you know is asking for a reputable organization to donate time or resources, I can personally recommend Operation Airdrop. I don't work for them obviously and they don't know me from any other volunteer out there, but they are truly saving lives and getting supplies directly into the hands of those that need it most!



Hopefully this (message) sends and hopefully my hotspot will get me into the meeting this morning!” 


~Whitney




Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education Pilot Money Guys Pilots

Why Estate Planning is Essential for Pilots

Professional pilots are economically valuable and worth every penny earned not just because they can fly safely from Chicago to LAX.  The real reason pilots are so valuable to their airlines and the flying public is that they are prepared to navigate dangerous weather, handle in-flight emergencies, and make difficult decisions. In other words, pilots are trained to get their passengers safely where they want to go regardless of what happens along the way. 

One of the most difficult things pilots do is prepare for an event that will most likely never happen in your flying career.  In almost 25 years of flying, I never lost an engine.  Which is great because one of my airplanes only had one engine!  I never lost a hydraulic system or experienced a dual-engine flameout, Sully-style.  However, I did (and you continue to) prepare for these events as if they are common occurrences.  This requires tremendous discipline, preparation and intense attention to detail.

The financial equivalent of preparing for life’s catastrophes is what financial nerds call estate planning.  I explain the gist of estate planning with a question to our pilot clients; will your spouse and children be okay if the unthinkable happens to you on your next trip?  It takes a lot of planning and preparation to answer this question with a confident “yes!” 

In this article I will explain the action steps and resources to help you confidently answer “yes” and have peace of mind knowing you’ve done everything you can to take care of your loved ones in case of a catastrophic life emergency.

Preparing for our own disabilities or death is akin to preparing for an engine loss right at rotation. It’s very unlikely that it will happen to you during your airline career. However, many pilots experience premature death and disability every year. But like the catastrophic emergency in the airplane, it’s hard to fully comprehend that it might happen to you at any moment. 

I recently returned from a family vacation in Edisto Beach, SC. The water was very rough with strong winds and currents. I shared with my kids about rip currents and what to do in case they thought they were in one. Tragically, when we returned from our trip, I noticed an article about two parents drowning in a rip tide while their six children were on the beach in Stuart Beach, FL.  Sadly, their children tried to yell instructions to the parents while dialing 911 from the beach.  It’s hard to comprehend this devastating family tragedy. I’m sure the parents woke up that morning and thought, like the rest of us, those tragic things only happen to other people. Therefore they may not have been fully prepared for this unimaginable scenario. 

Can you imagine the estate planning that needs to be considered when both parents with six children pass away? Who will take care of the children- aka guardianship? Who will take care of the financial needs of the children? Especially if they are minors. These are questions many of us need to address and prepare for. 

While we can rationally acknowledge that we will all die someday, we can't imagine our own deaths.  In fact, it may be our brain’s biological tendency to protect us. In a research study conducted by Bar Ilan University in Israel, Yair Dor-Ziderman explains; “The brain does not accept that death is related to us...We have this primal mechanism that means when the brain gets information that links self to death, something tells us it’s not reliable, so we shouldn’t believe it.”

“...The moment you have this ability to look into your own future, you realize that at some point you’re going to die and there’s nothing you can do about it,” said Dor-Ziderman. “That goes against the grain of our whole biology, which is helping us to stay alive.”

I probably should have prefaced that section with the same warning in the article I quoted; “Warning: this story is about death.  You may want to click away now.” 

However, as I mentioned in the first sentence of this article, the very reason you are so valuable as a professional pilot is because it is your job to prepare for scenarios that we believe probably will not happen to us. And in the airplane, the chances are in our favor that they never will happen. On the other hand, we’re all gonna die...someday! I know you’re inspired now, right? 

Now that you know why it’s so difficult to get around to accomplishing estate planning for your family, it’s time to do some of that pilot stuff and get it done! Let’s start with the question:

Will your spouse and children be okay if the unthinkable happens to you on your next trip?

Here are the essential steps to prepare for your potential disability and/or untimely death:  

1. Do you have the essential estate planning legal documents?

Estate planning attorneys recommend that we all have the following documents at the ready:

  • Power of attorney; financial and healthcare
  • Last Will and Testament
  • Beneficiary designations
  • Living Will
  • Life insurance policies
  • Titles and property deeds
  • Living Trust – may or may not be required, depending on circumstances. 

2. Ensure the loss of your income will be replaced by savings and life insurance.

3. Does your spouse know where to find essential documents listed above?

  • Take inventory and make sure everyone knows where to find these documents and passwords.  Review the contents and location occasionally.

4. Does your spouse have access to cash, funding to pay bills in your absence?

  • Our experience was that financial account transfers and life insurance payouts can take some time.  Be sure to have access to several months of cash to keep the household going while waiting for access to other assets.

5. Digital logins and passwords

  • This deserves its own category now.  Consider using a password manager for information security of passwords plus the ease of sharing with your spouse. 

Click here for a PDF version of an estate planning checklist from Freewill.com.

Great resources to help get with estate planning

•    Great website: Getyourshittogether.org:  https://getyourshittogether.org/

I almost always refer to this website to help people.  Not just because the name of the website is awesome! Founder and author of “What Matters Most”, Chanel Reynolds, experienced the premature death of her husband at a very young age.

From her website, “I am immensely proud of the book and grateful for the opportunity to tell the whole story of what happened, what I wish I’d done and what you can do when life goes sideways and what can help before and after the shit hits the fan...”

Another excerpt from the website: “Will you be prepared if life knocks you sideways?

Get your family protected with the critical ‘What-if’ answers like wills, power of attorney, healthcare directives, digital details and legal documents you need today and someday...”

•    Online website, TrustandWills.com, for great information and getting your estate documents completed:

There is still much debate about getting estate planning legal documents accomplished online.  I can’t give advice in this format, but I will say the online resources have vastly improved over recent years.  Using TrustandWills.com you can accomplish estate planning and get the support of an estate planning attorney in your state. 

From their website:   “Just like estate planning isn’t a one size fits all deal, neither is the help that our clients need. That’s why we're giving our members access to one-on-one time with licensed estate planning attorneys in their state. We want to offer products and estate planning tools that are inclusive for everyone, whether you have a multi-million dollar estate, or you’re just starting out planning for the future. Learn more about the benefits of Attorney Support.”

I have not personally used TrustandWills.com for my own estate planning documents, but I refer to this website regularly for great information, resources and learning. 

•    Workbook – “I’m Dead Now What?”

We often give this book as a gift for those who prefer a physical document(s) to refer to in case of emergencies.  This book, if completed correctly, covers all the nitty gritty details that a loved one will need to know in case of the unexpected death of a spouse.  The circumstances will be more difficult than we can comprehend, I believe we should not make it worse by not being organized. 

•    Airline specific financial podcast (and shameless plug), Pilot Money Guys Flight #12: I’m Dead, Now What?

This is part 2 of the Estate Planning Series "I'm Dead, Now What?" Three steps to make sure your estate is prepared. If you are unsure whether you have a good plan for the unexpected, this is the podcast for you...documents you need to have in place, why getting organized is important, and how beneficiaries and trusts go together to protect your family. Also see, Pilot Money Guys Flight #13: I’m Disabled, Now What?

 

Charles Mattingly, MBA, CFP®

CEO, Leading Edge Financial Planning

Hopefully, you found this article interesting and helpful. If you have any questions, I can be reached at 865-240-2292 or charlie@leadingedgeplanning.com. 

Also, please tell us if we can help you on your journey to financial peace and prosperity! Click here to sign up for our newsletter or click here to schedule some time to chat about your circumstances in more detail.  Also, check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews.  Even the editor and founder of Aero Crew News – Craig Pieper!


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Rental Real Estate

How to Determine if Rental Real Estate Investing is Right for You?

It seems like there is almost a sense of obligation to purchase rental real estate once a person hits one of two financial milestones:

1. They maximize their airline retirement savings plan

2. Their income tax bill becomes so onerous that it compels them to take evasive action!


If you’re not there now, you will be soon!

Are either of these milestones reason enough to pull the trigger and purchase physical real estate for rental? My short answer is, no! However, there may be some other good reasons to do so, and we’ll explore them in this article.

In my financial planning practice, I am fascinated by the number of people that almost feel a sense of obligation to purchase rental real estate. It’s as if there’s a message out there somewhere that says:

• Step one: max 401k

• Step two: purchase rental real estate


Otherwise, you’re not really a sophisticated or properly diversified investor. 

Unfortunately, real estate is not always the tax savings or investment panacea it’s made out to be.

In this article, I will explain some common myths and misconceptions about the tax and investment benefits of owning rental real estate. If you’re in a hurry, look to the end of each point for the lessons learned. These lessons may prevent you from going down a path that may not be right for you or, at least, prevent you from making the same mistakes I did!


1. Rental Real Estate is Not a Hands-off Activity


There is no easy money. Grant Cardone makes it look like you purchase a real estate property and then board your private jet for the Caribbean. Easy breezy!

The phrases “side hustle” and “passive income” sound sexy and easy, but they are extremely misleading. In my experience, if you’re investing in real estate the right way, you’re probably self-managing and maybe even doing some of the work yourself. Sweat equity! If you’re outsourcing all these tasks to a management and maintenance company, be sure to check your profit margins and compare them to an alternative investment.

We’ve seen people spend all their investment profits on HOA fees, management, maintenance, taxes, insurance, etc. There are plenty of other great investments that do not require any of those expenses.


Lesson Learned:

Always think about the opportunity cost of investing in real estate. For example, you can get close to 5% guaranteed right now (August 2024) in treasury bills without worrying about renters, maintenance, and eviction notices. Make sure you’re rewarded appropriately for the time, money, and risk of real estate investing.


2. Are You Running a Real Business or Just Being Nice?


Many rental real estate investors that I know do not treat their rental real estate like a real business. I’ll use my father-in-law as an example. He’s the nicest guy in the world, so he rarely raises his rent. There is some value in keeping your renters happy if they treat your property well. However, no matter how nice your renters are, you don’t need to take money out of your business and give it to people. That’s called charity.

• Capitalization Rate (Cap Rate):

Evaluates the profitability of an investment property. A higher cap rate indicates a higher potential return on investment. This is also a great number to evaluate whether the time and effort are worth investing in rental real estate.

Cap rate = Net operating income ÷ Property value:
 Example:
 $24,000 (net operating) ÷ $500,000 (property value) = 4.8% Cap Rate


In this scenario, your success as a real estate investor hinges on the hope that your property will significantly appreciate. This is because  (At the time of this writing- August 2024), you could get approximately 4.5% - 5% in a treasury bill guaranteed, with zero effort or worry about renters.

If you believe you have a high chance of property appreciation, you may be willing to accept a lower cap rate and vice versa. However, be careful that solely relying on property appreciation does not become your main real estate strategy. 

One maxim of real estate investing that stuck with me was, make money when you purchase, make money when you rent, and make money when you sell. I learned from experience that any one of those is relatively easy to achieve. All three of those components are challenging and take great effort and due diligence. 

• Net Operating Income (NOI): 

Shows how much money a property is making. It can help evaluate your return on investment (ROI), assess cash flow, and make decisions about pricing, expenses, and business strategy.


NOI is used to measure the profitability of your property.  To calculate the net operating income (NOI) of a rental property, use this formula:

Real estate revenue – Operating expenses = NOI

The NOI is used mainly to determine if a property should be considered for investment. Calculating NOI shows your potential profitability. If a property has a very low NOI compared to similar rentals in the area or investment alternatives, you may want to look elsewhere to invest your money.

• Non-measurable Measurables:

What is your time worth?  You may be able to put a precise number on this since you are paid by the hour.  Don’t forget to factor in the cost of your time when calculating the cap rate and the NOI.  


Lesson Learned:

Do you enjoy being a real estate landlord? Or do you worry or stress about the next call from the renters or management company?  I did, and it sucks! I became tired of the kids flushing their toys down the toilets. I also did not like the boyfriend threatening to burn the place down because my renter broke up with him. True stories! And there are many more good stories where those came from. Those events helped me to remember that I had the ability to earn as much as one month's rental income by picking up a two-day airline trip!


3. Use Leverage Wisely!


Leverage: When I helped a friend run all the rental real estate numbers like a real business, I realized that using leverage (borrowing-mortgage) played a major role in the profitability of his rental real estate.

Does this mean you should borrow 100% of the property’s value? Absolutely not.  Think Great Financial - Housing Crisis 2008. Brought on largely by the over-levered housing consumer. On the other hand, is completely paying off every rental property the highest priority? Probably not.

You, as the investor, must be comfortable with a responsible balance of debt. One thought to guide your decision is to consider if you could make the mortgage, property tax and insurance payments if there were no renters? How long could you sustain these payments with no renters? These are questions you must consider as a real estate investor.
 


4. Tax Implications of Owning Rental Real Estate: The good, the bad and the many disclaimers and exceptions.

First, never let the tax tail wag the dog!


Focus on increasing your net worth and purchasing quality investments.  The tax benefits are a nice secondary benefit.  

Paying taxes often evokes a visceral response and drives us to take actions that may reduce our net worth solely to reduce our tax burden. I’ll admit, it is a nice feeling when I get that two-thousand-dollar refund at tax time. (Even though it may be better to zero out my tax refund as to avoid loaning the Government my money.) 

The point is we are overly focused on the net tax result at tax time.  We quickly forget about the benefit of rental income during the year. For example, many people are willing to reduce their monthly rental income to zero, usually by spending more on the rental property, simply to avoid a large tax bill in April.  We find ourselves advising clients not to lose money on purpose just to save on taxes!  


Lesson Learned:

Purchase quality real estate that may provide a good return on your investment. Focus on the investment and the tax benefits will follow.  

Depreciation Tax Deduction:  The phantom rental expense.  

Rental property owners can use depreciation to deduct the property's purchase price and improvement costs from their tax returns.

Here are two quick examples to explain the benefits of depreciation. But before I wade into these dangerous tax waters, understand that there are exceptions to every tax rule and something that initially sounds like tax magic will probably be taken away by the IRS as your income increases. This is the case with depreciation of rental property as well.  Click here to learn more about the details of MACRS depreciation system.

Overly simplistic example for illustrative purposes: Deducting the depreciation expenses from your current rental income (probably not deducting from your airline income – see below and seek advice from a tax professional): 

The IRS assigns a “useful life” to residential rental property of 27.5 years. Therefore, if you purchased your property (cost basis) for $300,000 then you simply divide the cost basis by 27.5. Your potential depreciation tax deduction may be $10,909 per year. 

For every full year a property is in service, you would depreciate an equal amount: 

3.636% (100% divided by 27.5) each year as long as you continue to depreciate the property.

More disclosure:

Do not use this example to calculate your tax deductions. If your income exceeds certain limits, you may have to defer the deduction. You would also need to calculate the true adjusted cost basis which is not equal to the purchase price of the home.  

Lesson Learned:

Take the time to understand these tax nuances. It’s not good enough to delegate this knowledge to your tax preparer. They can help you accomplish your tax return correctly but if you want to be a great CFO of your real estate business, you need to have a working knowledge of the IRS tax regulations pertaining to rental real estate.  

Do not expect to offset your airline income with rental real estate losses.

In most real estate investing scenarios, you will not be able to deduct rental real estate losses against your airline income.  

Real estate investors have been known to spend lavishly on anything having to do with their rental properties, thinking that the tax-deductible expenses would reduce their airline income and therefore their income taxes. Why not spend $80,000 on a used Kubota skid steer for your rental property if you could use that expense to potentially save $19,200 in income taxes. Wow! Less taxes and an awesome toy. 

Unfortunately, there are very strict tax rules about deducting passive real estate expenses against your active airline income. To better understand this concept, we first must know that the IRS’s definition of active and passive income is very different from that on Instagram. 

First the easy definition – active income is income received from a job or business that you actively participate in, such as your airline job.

From TaxSlayerPro.com:  “Passive income” is often used colloquially to define anything from stock investments to blogging. But the IRS has specific parameters for passive income activity. For tax purposes, true passive income activities are either 1) “trade or business activities in which you don’t materially participate during the year” or 2) “rental activities, even if you do materially participate in them, unless you’re a real estate professional.”

The last statement is what really limits an airline pilot’s ability to deduct real estate expenses from your airline income.  So, what is a real estate professional you ask: 

From IRS.gov; Instruction for Form 8582:

Any rental real estate activity in which you materially participated if you were a “real estate professional” for the tax year. You were a real estate professional only if:

More than half of the personal services you performed in trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated, and

You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

It is not impossible to be considered a real estate professional but the “...more than half of the personal services you performed...” statement is the one that usually prevents pilots from also being considered a real estate professional. Clearly if you are married, filing jointly and your spouse is a legitimate real estate professional, you may be able to take advantage of the tax benefits of a real estate professional. 


Lesson Learned: 

Use caution and seek professional legal and tax advice to keep out of trouble if you decide to pursue this path. 

What can you deduct and why may quality real estate still be a tax-smart investment? 

Even though you may not be able to offset your airline income with rental expenses, you can offset your rental income with expenses incurred in the activity of renting. For example, if I earn one thousand dollars per month in rent, that could potentially be taxed at my marginal income tax rate. For an airline pilot that can easily be 24%, 32% or even higher, considering the latest contract bonuses and pay increases. 

That could increase my tax bill by $3,840 (32% x $12,000). That feels really painful when the tax bill comes due in addition to your airline tax bill. (You’ll quickly forget about the $12,000 in rental income you made throughout the year!)

So, in this example you could use your advertising costs, auto expenses, cleaning costs, and our favorite, depreciation just to name a few. Clearly you would not want to spend more on advertising simply to reduce your taxable income, but the expense can help reduce your tax bill if you need to advertise. 


Lesson Learned: 

Keep great records of all your potential deductible expenses. It will be required if you get audited by the IRS and it will help you determine if you’re spending too much on your investment.  


5. The psychology of money can make rental real estate a good investment.


That sounds weird so let me explain. Many of us stress out about the stock market fluctuations. The fact that the stock market seemingly tanks at the release of any negative news headline is frustrating to many people. 

Furthermore, we can view the value of our investments minute-by-minute on our phones. It seems like when the price of an investment goes down because of something completely unrelated to the quality of the company, my life savings disappear. 

When I own rental real estate in my local town, or any location really, I usually do not see or hear about any price fluctuations. In fact, before the housing crisis of 2008, we began to believe that the price of real estate could not go down! 

We learned the valuable lesson that real estate values can and will go down but at least I can’t see the price fluctuations minute-by-minute like I do in my 401k. This can be a tremendous benefit that helps me stay the course with my rental properties.

Investing in real estate, especially locally, gives investors a sense of control. And, sometimes, there really is more control. For example, you may have valuable information about your local real estate market that another investor might not have access to. In the world of stock investing, this is called insider trading and it’s illegal. Furthermore, in the stock market, any valuable information is processed and integrated into a stock's price in milliseconds. This is called an efficient market.  Your local real estate market is most likely not an efficient market. 


Lesson Learned: 

Find mentors that know your local area. Get involved in local organizations like the chamber of commerce. Learn about what new businesses are coming to your area. Network with local real estate agents since they may be the first ones to know when a property may become available. 

Hopefully, you found this article helpful in deciding whether investing in rental real estate is right for you.  There are many people that are really good at investing in real estate and being landlords. Those people are really good because they enjoy it, and they believe it’s worth their time. I am not one of those people! I’ve been down that road most of my adult life and I learned it’s not for me. 

In my humble opinion, I can get exposure to many different types of real estate investments through the public stock markets. More importantly, I’m the type of person who is okay with the temperament of the stock market. Many people want relief from that roller coaster ride, and I understand that. 


Final Lesson Learned

The final lesson for helping to decide whether investing in real estate is right for you is to know thyself!  

•  What do you want? 

•  What do you enjoy doing with your time?  

Life is short, don’t do anything solely for the benefit of taxes or even to make a bit more money if that’s not what you really need.

See Pilot Money Guys podcast to learn more about investing in rental real estate:  Flight #52: Gina Roth on How to Be a Real Estate Professional and Save on Taxes.


Charles Mattingly, MBA, CFP®

CEO, Leading Edge Financial Planning

If you have any questions, contact us at: 

•  Phone: 865-328-4969  

•  Email: charlie@leadingedgeplanning.com.  

Also, please tell us if we can help you on your journey to financial peace and prosperity! Click here to sign up for our newsletter or click here to schedule some time to chat about your circumstances in more detail.  Also, check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews.  


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Uncategorized

Planning for Your Long-Term Care Needs

As a pilot, you may be very familiar with the life insurance and long-term disability coverage provided to you by your airline. However, one of the more overlooked aspects of financial planning is the need for long-term care (LTC), especially in our later years as health declines and we’re unable to care for ourselves.

While your first thought may jump to LTC insurance, it’s important to emphasize that LTC planning goes far beyond the question of how to pay for medical services that you may need. Personally, I’ve seen challenging end-of-life scenarios negatively impact both the individual needing care and family members due to:

• The high costs of in-home care
• Dissatisfaction with nursing home care
• An undue burden on children/family members to personally provide care

Further complicating the planning is that many times the decisions surrounding LTC are taken out of the individual’s hands due to diminished mental and physical capabilities. Because of that, it’s vital to contemplate your ideal LTC scenario and put plans in place today to make sure your wishes are carried out.

In this article, we’ll focus on:

• The costs and types of care
• LTC insurance options
• Estate planning tools available

First off, what is long-term care?

The term is quite broad, and the types of services included in “long-term care” are highly dependent upon the level of care you desire, need, and can afford. 

For example:

• You may prioritize remaining in your home until death. In that case, it is important to plan for the costs associated with having in-home care available and potentially modifying the home to accommodate your care needs.
• On the other hand, you may love the idea of moving to an assisted living facility with services available on-site.

Unfortunately, sometimes we don’t get to decide how our LTC plays out. For example, those who suffer from extensive health issues that can’t be managed at home and/or Alzheimer’s or dementia may require care at a memory facility since staying at home may be unsafe. 

We will all likely need some level of long-term care. Because of that, it’s important to think about your desired level of care (e.g., staying at home) and the myriad of “what-if” scenarios. 

What is the likelihood you’ll need traditional LTC services?

LTC is typically geared towards those who are retired/later in life. Statistics tell us that:

• A 65-year-old has a 70% chance of requiring some form of LTC for the remainder of their life.
• Typically, the average length of care needed is three years, with women averaging 3.7 years versus men at 2.2 years.
• For those between the ages of 40 and 50, the number drops to 8% of people who will require LTC services. 

Keep in mind these are all averages. Some people may never need LTC, while others may require care for much longer. Even five years or more is not unheard of.

Costs of LTC

The costs associated with LTC can be steep, vary by location, and depend upon the level of care you are seeking or need. 

For example: 

• In the Dallas, Texas area the average monthly cost of in-home care is $5,720 per month.
• A private room in a nursing home or facility on average can cost $7,178 per month. 

To see the costs in your area, Genworth has an easy-to-use calculator: Genworth LTC Calculator. 

Unfortunately, these costs have been rising rapidly. From 2021-2023, the cost of an assisted living facility has risen over 18%, while in-home care for homemaker services has risen by over 22%. 

Paying for LTC

The next logical question when planning for LTC is how to pay for those services. The easiest option is to “self-insure” the costs. When considering this option, it’s important to look at the costs you might incur and if your income from Social Security, pensions, annuities, and your retirement savings will be sufficient to cover them. Fortunately, most financial planning software can run this type of analysis. Again, LTC may not be a discretionary spending category depending upon your ailments or care needed. 

You’ve probably heard horror stories (or experienced this yourself) of children effectively becoming the in-home care provider or having to pay for nursing facilities out of their own pocket due to the reasons mentioned above. On the other hand, suppose you can afford to self-insure, but giving your children or other beneficiaries a portion of your estate once you pass and not having that value eaten into by expensive LTC costs may be of high importance. In that case, or if you’re concerned that the future costs of LTC may greatly exceed your predicted income and savings, there are insurance options available.  

The long-term care insurance industry has been on a bit of a roller coaster ride due to a rapid increase in medical costs over the years. First offered in the 1970s and 1980s, this coverage has evolved over the years. At the turn of the century, insurers realized they had mispriced the cost of insurance and premiums increased rapidly, with many providers of LTC insurance exiting the market altogether. What was once a relatively inexpensive type of insurance became prohibitively expensive for insurers . Unfortunately for the insurers, longer life expectancies have increased the likelihood of needing LTC, thus making coverage more expensive. 

With that said, LTC insurance is still available as both a straight policy (premiums pay for LTC only) and hybrid policies (life insurance combined with a LTC rider). Due to the high premium costs, many people prefer to seek a hybrid policy. The rationale being that if you don’t (fortunately) use the LTC provisions of a policy then the money you put into the coverage isn’t for naught. Of course, with any type of whole life or indexed universal life policy the terms can be quite complex and the policies can be difficult to surrender, so it’s important to discuss the pros and cons with a disinterested, (e.g., not someone who benefits from selling the product via commission) trusted advisor before securing the policy. 

Additionally, when considering an insurance approach to funding LTC, there is a big difference between the care you want (e.g., homemaker to come to the house and cook/clean) versus when the policy will pay out. Let’s explore some of the more important aspects of LTC insurance to review when considering a policy:

Type of policy:

As mentioned earlier, you can secure a “straight” LTC policy or a hybrid policy linked to a permanent life insurance policy. 

• The LTC-only policy will likely be less expensive, however, a common critique is that the premiums paid will be a “sunk cost” if the LTC benefit isn’t needed. Additionally, premium costs can increase year over year and will likely have to be paid to keep the policy in force.
• On other hand, a hybrid policy can provide the features of a traditional life insurance policy with a LTC benefit rider. While these policies tend to be more expensive, the death benefit/cash value can be appealing. 

Eligibility:

Typically, this is associated with an inability to perform a specified number of ADLs (activities of daily living) defined as bathing, dressing, toileting, transferring, continence and/or feeding. 

In many policies, to qualify you must be unable to perform two of the six ADLs. As you can see, an ADL threshold is far different from, “I want someone to cook dinner when I’m older.” It’s important to pay close attention to make sure the policy will pay when you want it to pay. 

Waiting Period:

A longer waiting period means that you’ll have to pay out of pocket for any care required before the insurance policy pays. As in most LTC, disability-type insurance policies, having a strong savings and emergency cash on hand is important, especially if you’re dependent on pension or annuity to support your lifestyle in retirement. A typical waiting period is 90 days. 

How does the policy pay? 

Certain policies will only reimburse directly for services. Other policies will simply pay the maximum monthly benefit amount if you meet the eligibility requirements. The latter may be more expensive but can be less administratively burdensome and potentially pay a higher monthly amount depending upon the cost of care. 

Benefit amount:

Most LTC policies will pay both a monthly maximum amount and maximum total amount where payments cease once the LTC benefit is exhausted. For example, a policy that pays a maximum of $20,000 per month with a total benefit of $500,000. Assuming you use the full monthly amount, you would have a little over two years of coverage. 

This is probably one of the most important features of an LTC policy. If you want the ocean-front view, you’ll probably need a higher coverage amount. Also keep in mind that costs for care will likely rise. If you’re securing your LTC policy at a younger age, you may want an inflation rider on the policy to make sure your benefit keeps pace with what coverage will cost 10 plus years down the road. Of course, an enhanced benefit will probably mean higher premiums.

Premium amount:

All the features discussed above will impact the premium that you’ll pay. When considering the policy, you want versus the policy you can afford, this is where the rubber meets the road. Straight LTC will typically require premiums to always be paid (any may increase over time) to keep the policy in force. A hybrid policy, on the other hand, can be structured to pay premiums only to a certain age (e.g., 65). 

Whether you decide to plan for your LTC costs via savings or an insurance policy, there are other estate planning matters to consider. Specifically, implementing (or reviewing periodically for those who already do have) a living will and advanced healthcare directive. 

• A living will, as the name implies, dictates how you would like to be cared for in the case of incapacitation. For example, you can dictate under what circumstances you would allow CPR or mechanical ventilation.
• Additionally, you should create a durable power of attorney for healthcare to name an agent who you trust to execute your living will or make decisions in the case that you are in a situation not covered by the living will. As with any estate planning documents, it’s always a good idea to consult with an attorney when having legal documents made.

As you consider other means to provide for a potential LTC need, it’s important to emphasize that most private insurance providers and Medicare do NOT cover LTC . This is a common misconception that leads many to falsely believe that they have coverage, when in fact, they don’t. That said, it’s always important to review your insurance since certain services may be provided. For example, Tricare doesn’t cover assisted living, but does cover home health care if certain conditions are met. 

Perhaps more important than determining how you will pay for long-term care is starting the process now of contemplating what your end-of-life care looks like from a values and preferences standpoint. Doing this allows you to prepare your friends and family to represent your needs and wishes and ensure your beneficiaries are cared for. 

Fortunately, simple estate planning in the form of advanced directives can accomplish much of this planning. While we don’t know how our long-term journey and the costs associated with that care will “play-out”, by visualizing your ideal state and planning for “worst case” you’ll hopefully be on a path of financial security and contentment. 

~Andrew Christopher, CFA

Lead Financial Planner and Chief Investment Officer

Leading Edge Financial Planning, LLC. 

Hopefully, you found this article interesting and helpful. If you have any questions, contact us at: 

• Phone: 865-240-2292
• Email: Andrew@leadingedgeplanning.com.  

Also, please tell us if we can help you on your journey to financial peace and prosperity! Click here to sign up for our newsletter or click here to schedule some time to chat about your circumstances in more detail.  Also, check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews.  Even the editor and founder of Aero Crew News – Craig Pieper!

LEGAL DISCLAIMER

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

[1] https://acl.gov/ltc/basic-needs/how-much-care-will-you-need

[1] https://pro.genworth.com/riiproweb/productinfo/pdf/131168.pdf

[1]https://ltcconsumer.com/resources/ltci-library/the-history-of-long-term-care-insurance/

[1] https://www.care.com/c/activities-of-daily-living/

[1]https://www.nia.nih.gov/health/advance-care-planning/advance-care-planning-advance-directives-health-care

[1] https://www.medicare.gov/coverage/long-term-care

Categories
Charlie Education

Stop Budgeting and Change Your Spending Mindset!

Of all the so-called sophisticated investment strategies that exist, I’m not sure any are as effective as building a solid foundation for how we spend our money.  

The way we spend our money reflects our belief system and values. For example, if I value time together as a family and with kids, it may be a good use of my money to purchase a backyard pool. On the other hand, if I purchase items solely because I can afford it and it’s because that’s what other people are buying, then the items I purchase may make me more unhappy than if I hadn’t purchased them at all.  

This is the non-mathematical concept behind the economic concept of Opportunity Cost. Chances are, we are all familiar with the idea that if I spend my money or make an investment in one area there is always the opportunity cost that must be considered. For example, before I purchase the monster truck I’ve always wanted, I must consider the opportunity I missed by not putting my money in an investment or savings account that may be able to yield four or five percent.  After analyzing the opportunity cost, the monster truck is much more expensive than I may have originally thought. 

The often-overlooked part of Opportunity Cost is the emotional component of our spending. Every time we make a decision to spend or invest our money in something, there is an emotional cost that we must consider as well. That emotional cost comes in the form of more stress due to budgeting constraints. Possibly more discord in our marriage because one person is a saver, and the other is the spender.

What does this look like in real life?

As a financial adviser (and former airline pilot), I get the opportunity to learn many valuable lessons from all of our clients. Many of our client families have done exceedingly well at saving money not only in their retirement accounts but also in their checking, savings and other non-retirement accounts as well. When I ask them how they can save in excess of retirement needs they simply respond with comments like these:

•     “We only spend on things that we know are going to bring us tremendous value.”
•     “We just don’t need to spend that much in order to enjoy our friends and family.”
•     “We learned that spending money on items just because someone else is doing it actually makes us unhappy.”
•     “We spend lavishly on the things that bring our family joy and we skimp on everything else that doesn’t.”

What I’ve learned from these informal interviews is that it’s not always about a fancy budgeting system. It’s not about using your superhuman willpower to forgo buying cool stuff. In fact, buy the cool, fun stuff! But make sure you only buy the cool, fun stuff that truly aligns with your values.

So, how do we make great spending decisions considering the emotional and mathematical components of Opportunity Cost?

I came across a great article the other day by Joshua Becker at www.becomingminimalist.com. The article, “It’s better to drive an old car than be burdened by new debt”, described how the well-known economic principle of Opportunity Cost can help reduce overspending, allow someone to save more for the future and reduce stress around spending habits.

Definition of Opportunity Cost from the article:

“In other words, with every purchase we make, there are sacrifices we assume—alternatives that we must forgo. Every dollar spent on an item is one less dollar that could have been spent somewhere else. Of course, it is also a principle that carries weight beyond mere dollars. Because sometimes the purchases we make require us to forgo alternatives that are bigger than dollars and cents.” “In this scenario, I had to give up something potentially more valuable than dollars. I had to sacrifice calm, peace, financial freedom, and the satisfied feelings of knowing the car I drive is fully paid for.”

Below are five ways to help develop a healthy mindset for spending that will help you build wealth. But first, why might you consider taking these steps? What is the reward?

One of my favorite speakers, author and podcaster, Ed Mylett says to “choose your hard.” I love this idea because we get to choose to make it difficult now; workout, eat right, etc. Or we can ignore the hard decisions now and suffer the consequences later. When it comes to spending your hard-earned dollars, choose to do the hard things now so it won’t be really hard in the future when you wish you were less stressed about money, more prepared to retire early from the airlines or God-forbid, didn’t get that divorce due to financial stress.

Five ways that work against us and using the economic principle of Opportunity Cost to increase financial peace of mind and happiness:

1. Be on guard against “consumerism” and know how it clouds your judgment.

If billions of dollars were on the line for a corporation you owned, what lengths would you go to get people to buy your stuff? My answer would be, there are no limits.

I personally believe that businesses and corporations are wonderful, they solve problems and make our lives better. However, they are also very good at convincing me that I need that new truck to be truly happy. Seriously, I’m convinced!

Advertisements are powerfully designed to influence how you feel about yourself. One of the most effective tools for advertisers in our culture is to foster jealousy and envy among us. Our faulty definition of success allows marketers to pander to our weaknesses while they define our success. New car, new boat, bigger home, etc.

For example, I didn’t know that if I owned a Hyundai Santa Fe that I could take my family on a grand adventure in the mountains, and we would all feel like powerful Vikings! Conquer the Weekend | Vikings | The All-New 2024 SANTA FE | Hyundai (youtube.com)

No action required, just be aware that there is a battle being waged and no psychological weapon is off limits!

2. Comparison is the thief of joy! Aka Envy.

President Theodore Roosevelt said it best, “comparison is the thief of joy!” If you do not know what your own values are, you will default to those of your neighbor. We always compare the worst of what we know about ourselves to the best assumptions we make about others.

Take the time to discover your personal and family values. It takes intentionality and effort but remember to “choose your hard.”

3. Adopt the “A” in the WRAP Process.

Chip and Dan Heath wrote a great book called, “Decisive.” In the book they wrote about how we all have a faulty process for decision-making. In fact, in one part of the book they compared the decision-making of Fortune 500 CEOs to that of a teenager. Those in the airlines have witnessed that phenomenon firsthand!

They suggest a framework for decision-making called WRAP. WRAP is an acronym that stands for: Widen your options, Reality-Test Assumptions, Attain Distance Before Deciding (wait), Prepare to be Wrong.

When it comes to making spending decisions, the “A” in WRAP is very powerful. Attaining distance before deciding. Wait and see if you still want that mountain cabin in six months. Is it still on your mind? This concept is akin to delayed gratification. Remember layaway! I do. That concept is long gone and not even a consideration in purchasing decisions. I recommend googling layaway and adopting the concept to help with a healthy mindset for spending and building wealth!

4. Practice gratitude.

There’s power in gratitude. Every institution from science to religion produces mounds of evidence about the mental and physical health benefits of practicing gratitude. If you routinely write down what you’re grateful for you will soon realize what you really need to be fulfilled and happy may be right in front of you.

Check out this great article about gratitude from Harvard Health Publishing: Giving Thanks Can Make You Happier.

Excerpt from the article: “In positive psychology research, gratitude is strongly and consistently associated with greater happiness. Gratitude helps people feel more positive emotions, relish good experiences, improve their health, deal with adversity, and build strong relationships.”

5. Work towards contentment.

I intentionally used the word “work” in this title because I believe that’s what we must do to become content. It doesn’t happen automatically most of the time.

I also believe that contentment is a powerful state of mind that is the pinnacle of not just financial but success in life as well. Another concept I’ve learned is that just because a person has more money, they may not be more content.

The best definition I could find of contentment is very simple, contentment is the state of being happy and satisfied. It is the opposite feeling of, “if I only made more money, had a bigger house, a nicer car, etc.” Furthermore, contentment does not mean you must be happy with the status quo. It doesn’t mean that you can’t strive for a higher income and nicer things. In fact, it is normal and healthy to be content and not complacent at the same time.

Finally, budgeting expert Dave Ramsey says it best in his book, The Money Answer Book: Quick Answers to Your Everyday Financial Questions, author Dave Ramsey says that the most important financial principle is contentment.

“You can get out of debt, save money, and get on a budget, but until your intellect forces your emotions and your spirit to accept that STUFF does not equal CONTENTMENT, your finances will always feel stressed.”

P.S. Read the oldy-but-goody “Millionaire Next Door” and listen to and read anything by Ramit Sethi

~Charlie Mattingly

Hopefully, you found this article interesting and helpful.

If you have any questions, contact us at 865-240-2292 or Charlie@leadingedgeplanning.com

Also, please tell us if we can help you on your journey to financial peace and prosperity! Click here to sign up for our newsletter or click here to schedule some time to chat about your circumstances in more detail. Also, check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews. 

Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie High Income Pilot Money Guys Pilots Retirement Retirement Mistakes

If I Could Tell Every Airline Pilot One Thing…

If I Could Tell Every Airline Pilot One Thing…

If I could tell every airline pilot one thing it would be, save more money! I know it’s not rocket science, but like eating healthy and exercising – it’s not easy to do! 

As a Certified Financial Planner professional and an airline pilot myself, I understand how saving more can be a major challenge. If you’re just starting out with the airlines, you’ll make a lot more money as your career progresses but saving the right amount is never easy! I bet you won’t be surprised to know that some of these challenges are our own – new car, vacations, airplanes … In addition to our own limitations and difficulties, the IRS caps your qualified retirement contributions annually. 

Here, I’ll discuss three steps to maximize your savings and investing opportunities that will not only allow you to invest more now but can also greatly reduce your taxes in retirement. 

Every airline pilot, regardless of income, can and should contribute to their non-tax-deductible IRA. 

You need a taxable brokerage account in addition to your 401k and IRAs. 

Build tax diversification into your savings now so you’ll potentially pay less income taxes in retirement. 

Why save more?

Many airline pilots we work with have been employed by multiple airlines in their careers. Typically, this means they have had to start over with savings and investing multiple times. Furthermore, most airline pilots at major airlines made a transition from either the regionals, corporate or military careers. Most likely, those pilots took pay cuts to make the move to their major airline of choice. There are two important takeaways from this:

1) If you are a young pilot aspiring to work at a major airline, save your money now for that eventual transition, and

2) If you are a more senior airline pilot, but because of our tumultuous industry you were late to start saving for retirement, ​simply maximizing your qualified retirement accounts may not be enough. 

Every airline pilot, regardless of income, can and should contribute to their non-tax-deductible IRA 

I’ve found that some pilots with whom I’ve flown believe they make too much money to contribute to an IRA. Not true! Many pilots misunderstand the tax rules for contributing to IRAs. It is true that most airline pilot incomes are too high to contribute to a ​tax-deductible​ IRA, as well as a Roth IRA. However, anyone, regardless of income, can contribute to a non-tax-deductible IRA.

Although contributing to a non-tax-deductible IRA is beneficial, the best reason to contribute is to then convert your traditional IRA to a Roth IRA. This strategy is commonly referred to as the backdoor Roth IRA. There are no income limits on converting your traditional IRA to a Roth IRA, however there are a few things to consider before you choose to execute the backdoor Roth IRA strategy.

The process of converting your traditional IRA to a Roth IRA can be simple, but make sure you are aware of the tax rules that pertain to Roth IRA conversions. For example;

  • If you already have other IRA accounts, then all or a portion of your conversion to Roth IRA could be taxable.
  • One strategy to possibly avoid this taxation is to consider rolling your pre-tax IRA into your company’s 401k plan and then executing the backdoor Roth IRA the following calendar year.
  • Seek advice from your financial advisor or tax professional to make sure you follow IRS guidelines and make sure to correctly document the Roth IRA conversion on your tax return.

You need a taxable brokerage account in addition to your 401k and IRAs.

There is no IRS limit to how much you can save in a taxable brokerage account. You can withdraw your money anytime without penalties and there are very few limitations on your investment choices. You will not receive a tax deduction for your contributions to a taxable brokerage account, however, these accounts have other great tax advantages.

Essentially, you can create your own tax deferral on the growth of your investments as well as enjoy lower capital gains tax rates if you invest using low cost exchange traded funds (ETFs), individual stocks or low-turnover stock mutual funds. Make sure to avoid short-term capital gains by holding your investments for at least one year. Once you withdraw or sell the investments in your taxable brokerage account you’ll pay capital gains tax rates which are typically lower than ordinary income tax rates for a retired airline pilot.

Build tax diversification now so you’ll pay less income taxes in retirement. 

Sometimes we forget the entire reason for saving and investing now is to create your own paycheck during retirement. You can significantly reduce the income taxes in your retirement if you are intentional now and have a plan. Your goal should be to fill up at least three different types of investment accounts in order to increase tax diversification and potentially reduce your largest expense in retirement – taxes!

1. Pre-Tax 401k: Ordinary income tax rates upon withdrawal in retirement

2. Roth IRA and/or Roth 401k: Tax free in retirement

3. Taxable brokerage account: Capital gains tax rates

Bonus savings account: If it is appropriate for your family’s health care, consider using your airline’s high deductible health care plan so you can take advantage of the health savings account (HSA). The HSA is the only account with triple tax savings. They are tax deductible, they enjoy tax-free growth, and are tax free anytime they are used for qualified medical expenses.

One of your largest expenses (second only to taxes) in retirement will most likely be your healthcare expenses. Personally, I use my HSA as a healthcare 401k. Furthermore, once I turn age 65 I can use the funds from my HSA for any expenses with the understanding that I will pay ordinary income taxes on the gains if I use the funds for anything other than healthcare expenses.

 

Please reach out to us anytime. We’d love to hear from you because we’re here to help you navigate to your savings destination. Fly safe!

865-240-2292

info@leadingedgeplanning.com

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Pilot Money Guys Pilots

Trust Your Instruments, Not Your Gut, when it Comes to Flying AND Investing!

TRUST YOUR INSTRUMENTS, NOT YOUR GUT

      ... when it comes to Flying and Investing!

As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots. 

One of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D. Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime VFR conditions, this is probably a non-issue. However, in weather or at night, this type of spatial-D is potentially deadly. 

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night, not knowing what is up or what is down. 

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested, we were headed for the second Great Depression. Don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be terrifying. 

One slightly humorous example of investor spatial-D was early in the pandemic when the share price of ticker symbol ZOOM increased dramatically due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM. 

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. As an investor, if you did not trust your instruments during 2020, it may have been very costly. 

So, it’s a dark and stormy night, what are the instruments you rely on and trust? What are your primary and backup instruments? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves 

Emergency Funds. Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies. Studies also show having cash in the bank makes people happy. In an article posted on PYMNTS.com, Can Cash Really Make You Happier, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,  

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history. 

You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission. New military pilots call this chair flying. Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety before a sporting event or concert. 

3. Admit that times are scary and you do not know what’s going to happen. 

This may sound obvious, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold. We have heard investors say, “My gut tells me…” many times. Don’t ever make investment decisions based on what your gut tells you!

Some of the best investors in the world invest with the mindset of preparing to be wrong. In other words, they diversify their investments. Diversification is not popular or sexy because it’s like admitting that you’re not all-knowing and you do not know what’s going to happen in the future. Diversification allows you to be successful in multiple investment and economic scenarios. Furthermore, diversification can feel disappointing but prove to be a profitable strategy over the long term.  

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years. 

4. Prepare and Plan by having a clear vision of your goals and priorities.

If you don’t understand the “why” behind your investment strategy as well as why you’re investing and saving in the first place, you will most likely bail out on your plan during difficult and uncertain times. Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower than had you remained invested as originally planned. Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success. I believe the same applies to your financial and investment game plan. 

5. Remember you are invested in companies – not politics. 

Sometimes our politics cloud the investment and retirement planning picture. This rule falls under the axiom; “control the controllable.” If you’re allowing your politics to affect your investment game plan than you may want to see rules number two and three above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education

What is Legacy Planning and Why it Matters to You Now?

Yes, I’m a Tim Mcgraw country music fan. I think at this point, he might be considered old school country music. Nonetheless, when we unpack the subject of planning for our legacy, we conclude with the idea that we must first face our own mortality.  

  • What is it that we really want out of our lives?
  • What purpose or cause are we excited about?  
  • What will we look back on at “the end” that will have truly brought us joy and fulfillment
"Begin with the end in mind."

One of my favorite sayings is, “Begin with the end in mind.” I don’t know who said it first, but I know it’s the premise of the book “The Seven Habits of Highly Effective People” written by Stephen Covey. 

When we begin with the end in mind, i.e., our own mortality, it gives us the right perspective and context around the decisions we make today. It gives us the passion and urgency to impact those around us in a positive way. It also enlightens us as to what values we would like to pass on to our children. 

 
Legacy Beyond Financial Wealth
I turn fifty years old this July 2024, and I'm starting to feel a sense of urgency about what I am passing on to the next generation. Don’t get me wrong, I’m not concerned as much about how my children will handle gobs of money when I die (not yet anyway!). On the other hand, I’m more concerned about setting them up for success and not passing on certain dysfunctions I have battled through in my life.
I want my kids to be more secure in who they are than I was. I want them to know that in all situations, they are worthy, they are loved, and they are valued. You might say, these are our family values that I want to be intentional about passing on. 
Furthermore, I sincerely believe that I may have been a better military and commercial airline pilot if those values had been part of my natural identity from the start. When I think about creating my family, or community legacy, these are the things I think about.

 

Steps to Create an Intentional Legacy
This is an article about money and finances, so how do our values fit or apply to passing on wealth?  My answer to that question is this: 

If all I do is pass on financial wealth, there is a good chance my money may do more harm than good if the values I believe in are not part of my legacy as well. In essence, if I only pass on money to the next generation, I may actually set them up for failure.

  • Passing on character, values AND financial wealth is a very difficult thing to do. In fact, most millionaires in the United States are first generation millionaires

In a recent article in Business News Daily, author Stella Morrison says it this way:

”...around 68 percent of those with a net worth of $30 million or more made it themselves. Further, a second study by Fidelity investments found that 88% of all millionaires are self-made, meaning they did not inherit their wealth.” 

Let’s face it, airline pilots are earning more money now than ever. Many of you will be able to pass on significant wealth to the next generation or causes you care about. Furthermore, you will leave a legacy whether you know it or not, whether it’s good or bad.  Why not take the time to make it a good one? When you’re facing the end of your time on this earth, what will you value the most? Allow those questions to guide your life right now. 

Below are some practical steps and points to ponder to help you begin to think about how to proactively design your life and legacy. Because if you don’t take the time to be intentional about it, it will happen to you, and you may not like it!


Define the Problem:
You work your butt off to create income, wealth and a good life.  But your children probably didn’t see you overcome the obstacles and the challenges it took to get where you are. Money is not like other areas of our lives where we can expect our kids to pick up on our good habits and characteristics without significant effort and intentionality.

The other day I asked a friend of mine how his son got interested in the weightlifting team at his high school. He shrugged his shoulders and commented that his son must have been influenced by seeing him and his wife work out consistently over the years.

Learning about money and personal finances, on the other hand, is very different. Often families have great money habits, but if these principles and habits are not clearly communicated misperceptions can form.

For example, “my parents don’t spend lavishly, therefore we must be broke.”  In this example you may have excellent money habits but unless your money values and your intentions are clearly communicated you may unintentionally pass on an attitude of scarcity versus an attitude of abundance.


Here are three steps to consider if you want to be intentional about passing on your legacy:
Your children may not see all the hard work and sacrifice you put in to become a high-income airline pilot. All they see is you home three to four days a week trying to catch up on house chores before you pack your bags again. “That’s not so bad...I like this airline stuff!”

 

1. Share your experiences, challenges and struggles with your loved ones.
Consider sharing more of your experiences with your family. At the appropriate time, discuss some of the challenges you overcame to become that highly skilled, highly sought after airline pilot.
  • Your kids may scoff (mine just laugh) at you a little when you share but they will remember you struggled and overcame obstacles.  
  • Hopefully, when inevitable challenges come their way, they will remember that even though you struggled at times, and you were able to overcome obstacles and achieve your goals.  At least they will know enough to not expect the path to always be smooth sailing. 
  • Unfortunately, this means we must be a bit more vulnerable and open about some of our challenges. Personally, I like to make people think it was all a breeze. That would mean that I’m smarter, tougher, stronger than I really am. That’s not what our kids need to see.


2. Communicate with your spouse, significant other or trusted friends.

Often, we are creating a great legacy and positively influencing those around us without thinking about it. It may just come naturally to you.  However, for the rest of us, the first step is to literally say it out loud. What is it you want? Bring the subconscious into the conscience by discussing it with someone. I often forget that my wife doesn’t know what’s on my mind or doesn’t know what I’m trying to accomplish by talking to our kids about “who they are.”

•    Better yet, write it down. There is something very powerful that happens when you write down your goals, vision for your family, or family core values.  If you search the internet, “why is writing down my goals important” you will get a slew of great articles about how you are 42% more likely to achieve your goals if you write them down. 

One article from Inc.com written by Peter Economy, The Leadership Guy says, “writing your goals down not only forces you to get clear on what, exactly, it is that you want to accomplish, but doing so plays a part in motivating you to complete the tasks necessary for your success. The process of putting your goals on paper will force you to strategize, to ask questions about your current progress, and to brainstorm your plan of attack.”


3. Write down what you want people to line up to thank you for on your deathbed.
A little morbid, I know. However, let's just admit that we’re all going to die someday. And all the toys you’ve accumulated will not be on your mind when that time comes. What will be on your mind? What do you want your epitaph to say?
The next time you’re flying from New York to San Francisco… 
•    Take some time to ponder what the top five things you want to say about yourself before you’re gone.
•    Take some time to plan what you want to be remembered for, forever.
•    Write down what non-financial character traits and values you would like to see in your family passed down for generations.  Is it your faith? Is it something specific to your family such as an attitude of service before self or leadership. Be intentional and plant the seeds now.

 

Values to Pass on to Future Generations
In closing, here are a few of the values we are trying to pass on to our young children.

1.    An attitude of stewardship versus an attitude of ownership. In other words, we’ve been blessed with something (money, health, relationships) and it is our responsibility to take care of them, nurture them and hopefully bless others along the way.

2.   An attitude of generosity. Study after study shows that giving makes us happy. That’s all there is to it, so help them build habits of generosity now.
3.   An attitude of abundance versus scarcity. I believe if our kids are secure in who they are, they will not feel the need to get more for themselves at the expense of someone else.
4.   An attitude of ownership and responsibility. We want to teach our kids that it’s okay to make a mistake or even fail at something.  It’s part of the growth process. I want my kids to know they can fail and overcome the situation or face the consequences and it’s okay. If we shortcut or insulate the struggles our kids may face or go through, we cheat them out of the opportunity to find out what they really want and what they are willing to do to get it.

Final Thoughts
What we do now will impact multiple generations, possibly hundreds of years. Passing on financial wealth is the easiest form of capital to pass on but it can be the most destructive if we haven’t prepared the next generation to handle the responsibility of wealth.

 

Hopefully, you found this article interesting and helpful.
If you have any questions, contact us at 865-240-2292 or Charlie@leadingedgeplanning.com.
Also, please tell us if we can help you on your journey to financial peace and prosperity!
Click here to sign up for our newsletter or click here to schedule some time to chat about your circumstances in more detail. 
Also, check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews.  Even the editor and founder of Aero Crew News – Craig Pieper!

 

Disclaimer
Leading Edge Financial Planning LLC (“LEFP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where LEFP and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.leadingedgeplanning.com.
The information provided is for educational and informational purposes only and does not constitute investment advice, and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
 

 

 
Categories
Charlie Education

The Tax Man Cometh – Do Not Be Afraid!

“Intelligence pushes you toward the idea that complex problems require complex solutions”

~Morgan Housel, Money psychology expert*

Paying taxes often causes a visceral reaction. I get it! It is probably the single most painful financial task we have to face on an annual basis. Furthermore, many of you recently received large contract bonus paychecks. For some of you, income taxes will be withheld up front and others may owe a large tax bill, due to under withholding, next April when tax-year 2024 income taxes are due.  

This angry, visceral reaction causes us to go to great lengths to outsmart the tax man. Many of us seek complex solutions to avoid taxes at all costs. Unfortunately this sometimes leads to bad investment decisions or large, unwanted purchases (trucks, tractors, airplanes!) that we may not want or need, all in the name of reducing our tax bill.  Do not let the tax tail wag the dog! This is easier said than done and akin to buying high and selling low in the world of investing.  

While there are effective strategies to reduce our tax burden, we should not do things that reduce our overall wealth and net worth.

Avoid the Complexity Trap

Pilots are known for their type-A personalities and “get ‘er done” attitude. Pilots work hard to solve problems and make things happen under very difficult circumstances. However, it is human nature to spurn the simple solution for the complex. This phenomenon is called the complexity bias. https://fs.blog/complexity-bias/ 

Be aware that complex tax reduction solutions often come with higher IRS audit risk as well as risks of repayment penalties and interest. Extreme cases may even warrant prison time. For some good entertainment while you are waiting on your delayed flight, simply search the internet for, “Airline Pilot Tax Fraud.”  You will find some very interesting characters doing things to evade taxes that might sound familiar and not too far fetched from some of the conversations we’ve had on the flight deck!  

While we are often tempted to overcomplicate our tax strategies, especially with big-ticket purchases, it’s essential to recognize that complexity can lead to costly mistakes. Here are a few key rules to follow:

  • Do not reduce your wealth and net worth in order to stick it to the tax man!
  • Do not seek out complex tax strategies that are high IRS audit risks when there are several simple, audit risk-free strategies to reduce your lifetime income tax burden.
  • Do not spend money on big-ticket items that you do not want or need in order to reduce your tax bill.  This is mathematically equivalent to spending one dollar to save thirty cents. 
  • Reducing your income tax burden over your lifetime may be more profitable than reducing your current tax bill.  
Tax Strategies

Sometimes we have to choose whether to reduce taxes now or invest in strategies that could reduce our income tax burden during retirement. Unfortunately, it’s hard to imagine our future selves and what we will need, which can lead us to decisions that might benefit us today but are very costly in the future.  

Below are four tax ideas that can help you legally avoid paying more taxes than you are  required to pay. But first here are three strategies that require special care and attention to detail in order to avoid gaining the attention of the IRS:


Strategies that Require Special Care
1. Claiming Residency in Another State using your Condo or Crash Pad 

Many high-tax states get very aggressive about going after folks that reside in their state but claim to be residents of another state. Of course there are circumstances where this is absolutely legitimate but use caution and keep extensive documentation. 

You can search the internet for requirements to be an actual residence of each specific state, but here are a few that are standard in most states: 

  • Spend 183 days or more in the state you claim to be a resident of
  • Enroll your children in school there
  • Register to vote
  • Receive your mail
  • No tiny homes…

For example, New York will look at the size of your house in Florida to make sure your residence in Florida is similar in size to your captain mansion in New York. Evidently purchasing a tiny home or small condo in Florida is a tell-tale sign that you don’t spend much time there.

2. Deducting Your Airplane (e.g., because you’re teaching your kid how to fly)

The details of when and how to deduct airplane expenses are very complicated and beyond the scope of this article. However, here are a few things to keep in mind.  

  • You cannot deduct the cost of your airplane (depreciation) unless it is used more than 50 % of the time for your (legitimate) business.
  • It is not a deductible expense because you need to keep your flying ratings current.
  • If at any time during the depreciable life of the airplane, personal use exceeds 50% there will be an immediate depreciation recapture.  (I.e., you will owe a lot of taxes all at once.)
  • All of the excess bonus depreciation is recaptured if the business use of the property falls below 50% and also a portion of the accelerated depreciation (the excess over the straight line) is recaptured if business use falls below 50%. (Updated 09/19/24)
3. Investing in Real Estate to Deduct Losses Against Your Airline Income

Remember rule number one – do not reduce your wealth to save taxes. It is not uncommon to see bad investments in real estate when high-income pilots are desperate to reduce their tax burden. In fact, it seems that we almost feel an obligation to purchase real estate solely for the tax deductions at a certain income level. I have heard many pilots confess that they must not be very tax savvy because they do have a real estate investment…or three.  Here are a few things to know before jumping into real estate investing:

  • Over a certain income level (currently $150,000) you cannot deduct real estate losses against your airline income. For example, if you replace the roof on your rental home and therefore show a loss of $10,000 on your rental property income statement you cannot deduct the loss against your current airline income. (However, the loss can be carried over.)

Note: If you are considered a Real Estate Professional, the above may not apply.  Being a real estate professional is a very high standard set by the IRS and is nearly impossible for an airline pilot to obtain unless they have a spouse, “in the business.”  

  • Real Estate can be a great investment. However, one rule of thumb I read a long time ago is good to keep in mind; In real estate investing you need to make money on three occasions; when you buy, when you rent and when you sell. That is not easy to do!
  • If you do not enjoy being a landlord and managing the business of real estate, I would avoid it altogether. There is no tax deduction worth making you miserable. If you plan on hiring a property management firm to delegate the pain, make sure they don’t eat into your profits too much. Some agencies can charge as much as 30% or more depending on the level of support. There are cheaper ways to invest in real estate if your costs become excessive.  (Publicly traded Real Estate Investment Trusts aka REITs) 
Smart Tax Strategies for Long-Term Savings

Instead of risking your financial future with complex schemes, here are four simple, effective ways to reduce your income tax burden over your lifetime.

1. Backdoor Roth IRA

This strategy is based on the IRS rule that:

  • Anyone, regardless of income, can contribute to an after-tax, non-deductible traditional IRA.  
  • Anyone, regardless of income, can convert a traditional IRA to a Roth IRA if they pay the taxes on the gains (if any) in the traditional IRA.  

There are more things to know before executing the back door Roth IRA, so make sure to consult your tax and investment advisor. 

2. Health Savings Account (HSA)

If you are relatively healthy and only frequent the doctor's office for preventative care and the occasional sniffles, a high-deductible health plan may be right for you. If that is the case, a Health Savings Account (HSA) is a great tax savings account. It is the only account in existence with triple tax savings: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

3. Taxable Brokerage Accounts (non-IRA, non-401k investment account)

This is the most overlooked and advantageous account once you’ve maximized your 401k and potentially the (back door) Roth IRA. The taxable brokerage account is very flexible. There are no contribution limits and no withdrawal penalties. It is taxed at capital gains tax rates, which for most of you is much lower than your income tax rate. Finally, if you invest in low-turnover mutual funds (index funds) and Exchange Traded Funds (ETFs), you can essentially create your own tax-deferred growth. 

4. Real Estate

Even though I bashed real estate previously, it can be great for rental income and investment diversification. People can be very successful investing in real estate if they enjoy putting in some sweat equity and managing the rentals themselves. Short-term rentals may qualify for cost segregation, bonus depreciation.

Bonus Tip: Electric Vehicle Tax Credit

If you’ve received a contract ratification bonus, consider purchasing an electric vehicle. If your adjusted gross income is below $300,000, you might qualify for a $7,500 federal tax credit.

Tax season doesn’t have to be a burden. By avoiding unnecessary purchases and focusing on long-term strategies, you can reduce your tax burden without compromising your financial future. Stick to these principles and consult a tax professional to ensure you’re on the right track. Smart planning is key.

Resources:

Morgan Housel CNBC article: “Why the smartest people make bad decisions – compared to those with average IQ.”  

How to establish Florida residency? Kiplingers Article

Real Estate Cost Segregation Study

Contact Us:

Phone: 865-240-2292

Email: info@leadingedgeplanning.com

Disclaimer:
The information provided in this blog post is for informational purposes only and should not be considered as financial advice. Please consult a qualified financial professional for advice tailored to your specific circumstances.