John Weston Blog

The Social Security Fairness Act (SSFA) was signed into law by President Biden on January 5, 2025. This eliminates the “Windfall Elimination Provision” (WEP) and the “Government Pension Offset” (GPO) from the current Social Security system.

This long overdue legislation will ensure that millions of retired public servants receive the full Social Security benefits they deserve by repealing the WEP and the GPO, which unfairly reduced the Social Security benefits that public employees or their spouses have earned.  These provisions were put in place in 1983, as part of the Social Security Amendments, in order to address concerns about the fairness and sustainability of the program.

Background on the WEP and GPO

WEP

The WEP affects individuals who have worked both in jobs covered by Social Security and those not covered by it, such as government employees or workers from foreign countries. This provision reduced their Social Security benefits by up to 50%, resulting in significantly lower retirement income than what they would have received if they had only worked in jobs covered by Social Security.

GPO

Similarly, the GPO affects individuals who receive spousal or survivor benefits from Social Security and also receive a pension from a government job that was not covered by Social Security. This provision reduces their spousal or survivor benefits by two-thirds of their government pension amount, often resulting in no benefits at all.

Impact on Affected Individuals

The WEP and GPO have had a disproportionate impact on certain groups of people, including teachers, police officers, firefighters, and other public service workers. These individuals often have dedicated their careers to serving their communities and may be forced to choose between collecting their earned government pensions or receiving their full Social Security benefits.

Moreover, the WEP and GPO can result in significant financial hardship for these individuals, especially as they near retirement age. Many were not aware of these provisions until it was too late, and they were left with reduced benefits that may not be enough to support them in retirement.

Recent Developments

In recent years, there have been several attempts to reform or repeal the WEP and GPO through legislation. The Social Security Fairness Act (SSFA) has gained bipartisan support in Congress and has been introduced multiple times since its inception in 1983.

What will the SSFA do for me?

On January 5th, 2025, the (SSFA) finally became law, marking a significant victory for retired public servants across the nation. This long-awaited reform repealed the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), restoring full Social Security benefits to those who had been unfairly impacted by these provisions. The passage of the SSFA demonstrated the power of persistent advocacy and bipartisan cooperation, bringing much-needed relief to countless retirees who had dedicated their lives to serving their communities.

Wealth Management with Towerpoint Wealth

At Towerpoint Wealth, we understand the profound impact that the repeal of the WEP and GPO will have on certain retirees, particularly those who have served as public employees. The passing of the Social Security Fairness Act unlocks new opportunities for individuals to positively reevaluate their retirement benefits and financial goals. For some, this may mean greater confidence in their ability to enjoy a secure and comfortable retirement, while for others, it may open the door to pursuing new ventures or travel plans. Regardless of your unique financial situation, now is the time to reassess and ensure that your wealth strategy aligns with these very recent legislative changes.

Our team at Towerpoint Wealth is committed to helping retirees and those nearing retirement maximize their economic potential in light of these changes. We specialize in tailoring comprehensive financial strategies, ensuring that our clients can make coordinated and informed decisions about their future. With the repeal of the WEP and GPO, you may be eligible for benefits that were previously inaccessible, and our advisors are here to help you fully understand this complex landscape. Together, we can evaluate your current plan, identify deficiencies and opportunities to optimize your income, and strategize on how to best leverage these changes to achieve your personal and financial goals.

If you or a loved one has been impacted by the WEP or GPO and would like personalized financial guidance, we invite you to reach out to us today. At Towerpoint Wealth, we are proud to be trusted financial stewards for the Northern California community, offering expertise and peace of mind during times of transition. Schedule a complimentary consultation with us and discover how we can help you enjoy the retirement and comprehensive financial coordination you deserve. Call us or visit our website and contact us—we look forward to getting to know and supporting you on your financial journey.

Frequently Asked What is Happening with the Social Security Fairness Act Questions

What is the Windfall Elimination Provision (WEP)?

The Windfall Elimination Provision (WEP) is a federal law that affects the Social Security benefits of individuals who have earned a pension from work not covered by Social Security, such as many public sector roles. Specifically, it reduces the amount of Social Security benefits you are entitled to receive based on your earnings history under Social Security-covered employment. WEP applies to workers who have fewer than 30 years of substantial earnings in Social Security-covered employment and also receive benefits from a job where Social Security payroll taxes were not deducted. The intent of this provision is to prevent workers who have both types of income from receiving disproportionately high Social Security benefits. However, the calculation can be complex, and understanding how this law impacts your eligibility requires careful analysis of your work history and earnings.

What is the Government Pension Offset (GPO)?

The Government Pension Offset (GPO) is another federal regulation that reduces Social Security spousal or survivor benefits for individuals who receive a pension from a job in which they did not pay into Social Security. Specifically, the GPO reduces spousal or survivor benefits by two-thirds of your government pension. For example, if you receive a monthly pension of $900 from non-Social Security-covered work, your spousal or survivor benefit may be reduced by $600. This provision was introduced to align Social Security benefits with other public pensions and to ensure equitable distribution. Many retirees are surprised by how significantly the GPO can impact their benefits, which underscores the importance of consulting a financial advisor to budget and plan accordingly.

How might the repeal of WEP and GPO impact my retirement plan?

The repeal of WEP and GPO would allow affected retirees to receive the full Social Security benefits they earned in addition to their public-sector pensions. This change could lead to an increase in monthly income, and dramatically alter retirement budgets. However, navigating this transition involves thoroughly understanding how the new regulations apply to your specific situation, including recalculations of your potential Social Security payments and the timeline for increases. Additionally, it may introduce tax or strategic implications, making it prudent to proactively consult with knowledgeable financial professionals. A careful analysis of your retirement plan should be conducted to incorporate these new benefits while ensuring continued financial stability.

Who is most affected by the WEP and GPO regulations?

The WEP and GPO regulations most commonly impact public servants, including teachers, police officers, firefighters, and employees of certain state and local governments, who worked at jobs where they did not pay into Social Security. For instance, teachers in states like California, Texas, and Louisiana often receive a pension through their state, but did not contribute to Social Security during their careers. These individuals might experience reduced or eliminated Social Security account benefits under the WEP and GPO provisions. Retirees with a combination of public and private employment are particularly vulnerable, as their years of Social Security-covered earnings may not fully offset the reductions. Awareness of these provisions is vital for individuals in these sectors to adequately plan their financial futures.

How can I calculate the effects of WEP and GPO on my benefits?

Calculating the effects of the WEP and GPO requires gathering detailed information about your earnings history, pension amounts, and Social Security-covered work. The Social Security Administration (SSA) provides calculators on their website specifically designed for WEP and GPO, which can offer an estimate of your reduced benefits. However, these tools may not account for nuanced scenarios, such as changes in employment or income. For a more precise calculation, working with a financial advisor who specializes in Social Security planning can be extremely beneficial. They can help you analyze your specific circumstances, explore potential strategies to mitigate reductions, and ensure you have an accurate understanding of your financial outlook.

What steps should I take if I think I am affected by these provisions?

If you believe the WEP or GPO may affect your benefits, the first step is to gather your earnings history, current mailing address, direct deposit information, and other information about any pensions you receive or expect to receive from jobs not covered by Social Security. Next, start by visiting Social Security Administration’s website to verify how these provisions apply to your situation, and use the WEP and GPO online calculators for preliminary estimates. After understanding the potential impacts, schedule a meeting with a trusted financial advisor who can guide you through strategies to optimize your benefits. This could include exploring additional sources of income, adjusting tax strategies, or advocating for policy changes if reforms are expected. Proper planning can help reduce the surprise and financial strain often associated with these complex rules.

Conclusion

At Towerpoint Wealth, we understand how overwhelming and confusing Social Security provisions like the WEP and GPO can be. Our team is dedicated to providing personalized guidance to help you take control of and properly coordinate your financial future. We invite you to reach out to us for a complimentary consultation, where we can begin to get to know you, review your unique situation, answer your questions, and develop a customized plan and strategy tailored to your needs. Contact us today to start building a plan that mitigates uncertainty and positions you for long-term success.

Navigating Market Volatility and Potential Tariffs in the U.S.

As Donald Trump takes his seat as the 47th President of the United States, investors are closely monitoring the potential impacts of his administration’s policies on the financial markets. Trump’s inauguration on January 20, 2025, marked the beginning of a term filled with significant priority and policy shifts, including the signing of numerous executive orders aimed at reshaping the economic landscape.

When it comes to investing, politics can be a powerful market driver. Whether it’s tax reform, trade policies, or industry (de)regulations, the decisions made in Washington often ripple through the economy and financial markets. As speculation grows about the possibility of a second Trump presidency, investors are left wondering how to navigate the potential changes ahead.

The Impact of Trump’s Policies on Markets

Donald Trump’s first term as president was marked by sweeping tax cuts, significant deregulation, and a trade war with China — policies that shaped market dynamics in both predictable and unexpected ways. While the stock market saw record highs under his leadership, periods of volatility were also common, as markets reacted to bold economic moves and controversial policies.

For investors, preparing for another Trump presidency means more than just analyzing historical market trends. It requires a forward-looking strategy that balances potential risks with opportunities. From navigating market volatility to optimizing tax strategies and adjusting portfolios to align with shifting economic priorities, proactive planning will be key.

In this article, we’ll discuss how investors can prepare for the uncertainties and opportunities of a Trump presidency. Whether you’re a seasoned investor or just beginning your financial journey, our goal is to help you build a resilient investment strategy that aligns with your longer-term goals.

Key Takeaways

• The Trump presidency is expected to bring significant policy changes, including tax reform, deregulation, and tariffs, all of which can create ripple effects across financial markets.
• Political uncertainty, trade tensions, and major policy announcements can lead to shorter-term market fluctuations, highlighting the importance of maintaining a steady hand and focusing on longer-term investment strategies.
• Industrial sector stocks, including those in manufacturing and energy, and healthcare stocks, may benefit from pro-business policies, while undervalued assets and alternative investments can offer growth and diversification opportunities during periods of volatility.
• Potential updates to corporate taxes, estate tax exemptions, and tax deductions could significantly affect portfolio returns, making tax-efficient strategies essential for investors.

Donald Trump’s Effect on the Economy and Markets

Donald Trump’s presidency will probably be remembered for bold economic policies and their sweeping influence on financial markets. As we look to the future, understanding the impact of these policies can help investors navigate potential changes and position their portfolios effectively.

Overview of Past Economic Policies

During his first term, Trump enacted many transformative economic initiatives that shaped both domestic and global markets. Some examples include:

• Tax Cuts and Jobs Act (TCJA): This landmark tax overhaul significantly reduced corporate tax rates, boosting corporate profits and stock market returns. It created a favorable environment for investors, particularly in sectors with high corporate earnings potential.
• Deregulation: Industries such as energy, financials, and manufacturing benefited from reduced regulatory burdens. This pro-business stance generally spurred economic growth, boosted domestic private investment, and contributed to investor confidence.
• Trade Wars and Tariffs: Trump’s aggressive trade policies, particularly with China, created ripples across global markets. While tariffs in the U.S. were aimed at protecting key domestic industries, they also significantly escalated the trade war. Tariffs in China targeting key industries like technology and manufacturing led to disruptions in global supply chains, and increased costs for U.S. businesses.

Key Sectors Likely to Be Impacted

A future Trump presidency could once again focus on specific sectors, creating both risks and opportunities for investors. 

Domestic stocks in sectors like manufacturing and energy may reap the benefits of pro-business policies and deregulation, potentially leading to a resurgence in job creation and investment opportunities in these industries. Deregulation and cost-cutting measures could create growth opportunities for healthcare stocks, particularly in pharmaceuticals and medical technology.

Antitrust scrutiny, on the other hand, could drive technology stocks down, creating volatility but also potential opportunities for savvy investors.

Lessons Learned from Past Market Reactions

Trump’s presidency demonstrated how closely markets react to political rhetoric and policy announcements.

• Historical Performance: The stock market experienced record highs during his first term, but it was also marked by volatility, especially during the pandemic, as well as trade disputes and geopolitical tensions.

• Investor Sentiment: Bold policy moves often triggered immediate market reactions, highlighting the importance of maintaining a steady hand and focusing on longer-term strategies instead of drastic reactions to news headlines.

By analyzing the past, investors can better anticipate potential portfolio effects and adapt their strategies to align with the economic priorities of a Trump administration. From sector-specific opportunities to broader market trends, understanding these dynamics is crucial for navigating the complexities of the investing landscape.

Preparing for Market Volatility

Political uncertainty has long been a driver of market fluctuations, and this trend is likely to continue during a second Trump presidency. Policy shifts such as new tariffs, regulatory changes, or tax reform often create ripple effects across industries and sectors. 

For example, the imposition of tariffs during Trump’s first term disrupted global supply chains, raising questions about tariffs and inflation while sparking market turbulence, affecting industries from technology to agriculture.

Markets tend to react swiftly to major policy announcements, both positively and negatively. A tweet or statement from the president regarding trade, interest rates, or fiscal policy could lead to significant short-term volatility. This further underscores the importance of maintaining a steady hand and resisting the urge to make reactive investment decisions.

Strategies to Mitigate Risk

Investors don’t have to be at the mercy of market swings. Understanding how to prepare for tariffs and other economic factors can position investors to make more empowered decisions. Proactive planning and diversification are essential tools for weathering volatility:

• Diversification Across Asset Classes and Sectors:
  Spreading investments across a mix of equities, bonds, real estate, and alternative assets helps cushion against downturns in any single sector. While it is possible that technology companies may face antitrust scrutiny, for example, energy or manufacturing sectors could benefit from deregulation under Trump’s policies.
• Defensive Investments for Stability:
  In times of heightened volatility, assets like bonds, utilities, and consumer staples provide a level of safety. These investments typically perform well in uncertain markets due to their lower risk and consistent returns. Treasury Inflation-Protected Securities (TIPS) can also be a useful hedge against inflation.
• Avoid Emotional Decisions:
  It’s easy to get caught up in market noise, especially during politically charged periods. However, research consistently shows that staying the course and focusing on longer-term goals yields better outcomes. Investors should avoid making drastic changes to their portfolios based on shorter-term political events.

Capitalizing on Opportunities

While market volatility can be unsettling, it also presents valuable opportunities for savvy investors. 

Certain industries may experience temporary setbacks due to political or economic shifts, creating attractive entry points for value investors. For example, tariffs or regulatory changes that temporarily depress stock prices can provide a chance to acquire high-quality assets at a discount. 

Beyond equities, alternative investments such as commodities, real estate investment trusts (REITs), or even gold offer diversification and protection against market turbulence. These assets are often less correlated with traditional equities, helping to stabilize a portfolio during periods of uncertainty. 

Rebalancing your portfolio in response to policy impacts can also be essential to maintaining alignment with your financial goals and risk tolerance. This proactive approach allows investors to lock in gains and strategically reinvest in areas poised for greater growth, turning market challenges into opportunities for longer-term success.

Tax Policies and Their Investment Implications

Tax policy changes are among the most impactful factors influencing investment strategies, especially under a Trump presidency. During his previous term, the Tax Cuts and Jobs Act (TCJA) lowered personal income tax rates for nearly all Americans, and lowered corporate tax rates from 35% to 21%, leading to increased corporate profitability and higher stock prices. If Trump continues to prioritize pro-business tax policies, investors may see an extension of the TCJA’s provisions, and/or further corporate tax reductions.

On the other hand, it is possible that there could be increased focus on eliminating specific deductions or credits to offset rising government spending. These adjustments could have significant implications for corporate earnings, dividend payouts, and investor returns. 

Understanding these potential changes is critical for positioning your portfolio to take full advantage of favorable tax conditions while mitigating potential downsides.

Tax-Efficient Investment Strategies

To navigate a changing tax landscape, investors may want to consider strategically incorporating tax-efficient strategies into their financial planning. Properly utilizing tax-advantaged accounts, such as IRAs and 401(k)s, can help shield your investments from immediate taxation, allowing your money to grow more effectively over time. Tax-loss harvesting is another powerful tool to offset capital gains by selling underperforming assets, which can help reduce your taxable income.

Estate Planning Considerations

Changes to estate tax exemptions could also be on the horizon. Under the current provisions of the TCJA, the federal estate tax exemption stands at $13.99 million per individual in 2025, but this amount could be reduced if the act sunsets as scheduled at the end of this year. However, at Towerpoint Wealth, we assign a relatively high probability that the TCJA will be extended this year, before it is set to expire on 12/31. 

Regardless, proactively reviewing your estate plan and considering strategies like gifting, creating trusts, or utilizing the current exemption limits can help preserve generational wealth. By working with financial and estate planning professionals, you can adapt to potential tax changes while ensuring your long-term legacy.

Positioning Your Portfolio for Economic Shifts

A well-balanced portfolio is the cornerstone of a sound investment strategy, especially during times of economic uncertainty. 

Growth-oriented investments, such as equities, can benefit from pro-business policies like deregulation and tax cuts. Industries like energy, manufacturing, and financials may see some renewed momentum under a Trump presidency, offering opportunities for investors to benefit from capital appreciation.

At the same time, stability is crucial to cushion against market downturns. Investments like bonds, cash reserves, and dividend-giving stocks can provide more predictable income and reduce overall portfolio risk. Striking the right balance between growth and stability helps to ensure your portfolio is positioned to weather economic shifts while pursuing longer-term gains.

Accounting for Inflation and Interest Rates

Inflation and interest rate trends are critical considerations when positioning your portfolio. If pro-growth policies lead to higher economic activity, inflation may rise, potentially eroding the purchasing power of your investments. Owning commodities, as well as Treasury Inflation-Protected Securities (TIPS) are an effective way to hedge against inflation, as they adjust with the Consumer Price Index (CPI) to maintain real (after-inflation) value.

Federal Reserve decisions on interest rates will play another significant role in shaping market conditions. Rising rates can impact bond prices and borrowing costs, while creating opportunities for income-focused investments. Adjusting your portfolio to account for these trends can help you maintain financial resilience in an evolving economic environment.

The Role of Global Investments

Increased trade tensions and tariffs could prompt volatility in global markets, but they may also open doors for investors willing to look beyond U.S. borders. International equities and bonds offer diversification and can serve as a hedge against U.S.-specific risks. 

Emerging markets with growing economies may present attractive growth opportunities, while developed markets can provide stability and steady returns. By diversifying globally, you reduce your reliance on the performance of the U.S. economy, ensuring that your portfolio remains resilient in the face of domestic economic challenges.

Working With a Financial Advisor to Navigate Political Transitions

Navigating the complexities of a Trump presidency requires more than just understanding the headlines — it demands a deep knowledge of tax laws, market dynamics, and regulatory changes. A seasoned financial advisor can help you interpret how these factors affect your portfolio, and develop strategies tailored to your unique personal and financial goals and risk tolerance.

Financial markets are inherently dynamic, and political transitions only add to this complexity. A proactive advisor will work with you to regularly review and rebalance your portfolio, ensuring that it aligns with evolving economic conditions and your personal objectives. They can also help you anticipate and adapt to regulatory changes, keeping your investments on track despite shifting market conditions.

Perhaps the greatest benefit of working with a fiduciary financial advisor is the peace of mind it provides. By delegating the complexities of financial planning and investment management to an expert, you can focus on your longer-term goals while enjoying the benefits of a well-crafted strategy.

Final Thoughts

The relationship between politics and investing is complex, especially under a Trump presidency, where policies can create both opportunities and challenges for investors. By understanding the potential impacts of economic shifts, tax changes, and market volatility, you can position your portfolio to thrive in a dynamic environment.

At Towerpoint Wealth, we specialize in helping clients navigate these uncertainties with tailored investment strategies that balance growth, stability, and tax efficiency. Whether you’re preparing for market fluctuations, optimizing your retirement plan, or exploring global diversification, our team is here to guide you every step of the way.If you’re ready to build a resilient financial plan that aligns with your unique goals and priorities, we invite you to schedule a 20-minute “Ask Anything” conversation today. Together, we’ll help you navigate the complexities of investing in this new presidency and beyond.

Planning for your child’s college education can feel overwhelming—but it doesn’t have to be! With tuition costs climbing every year, and limited access to financial aid, having a solid savings plan to help prepare you for your child’s education costs can provide financial peace of mind, reduce future debt burdens, and give your family the flexibility to focus on what truly matters. For busy couples in their 30s and 40s balancing careers, kids, and newfound wealth, having the right strategy can make all the difference. Even for grandparents wanting to contribute to their grandchild’s future, having an effective plan is important.

Here’s a breakdown of four top college savings options—in plain English—to help you prepare for your child’s future.

The Top 4 College Savings Accounts and Plans

1. 529 College Savings Plans

A 529 College Savings Plan can be a great go-to college savings tool. Why? Because it’s packed with perks like:

• Tax Benefits: Your money is subject to tax-deferred growth (your money is not taxed as it grows), and tax-free withdrawals for qualified expenses—like tuition, fees, or books—at the federal level. Depending on the state you currently reside in, you may be eligible for a state tax deduction!
• Flexibility: It’s not just for college! You can use it for K-12 tuition (up to $10,000 per year), at a public, private, secondary public, or religious school, certain apprenticeship programs, and more.
• Big Contribution Limits: Depending on the state, you can save over $300,000 per beneficiary—way more than other savings accounts allow.
• State-Specific Perks: In California, the ScholarShare 529 plan offers low fees and excellent investment options.

The best part? If your child doesn’t use all the funds, you can transfer them to another family member. Keep in mind, however, that non-education withdrawals will trigger taxes and a 10% penalty on earnings.

Even better, starting in 2024, you can roll unused 529 plan assets—up to a lifetime limit of $35,000—into the account beneficiary’s Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income. 

2. Coverdell Education Savings Accounts (ESAs)

Coverdell ESAs might not get as much attention as 529 plans, but they’re worth considering:

• Tax Perks: Like 529s, your savings grow tax-free, and withdrawals for education expenses are also tax-free.
• Wide Usage: Coverdell funds can be used for K-12 expenses, including private school tuition and supplies.
• Limits to Watch: Annual contributions are capped at $2,000 per child, making it ideal as a supplement rather than a standalone option.
• Income Restrictions: Higher earners may not qualify, which could make this less practical for some families.

For families saving for private school or seeking an additional savings tool, Coverdell ESAs can be a valuable complement to a 529 plan.

3. Roth IRAs for Education

While Roth IRAs are traditionally considered retirement accounts, they can also be a creative way to save for education::

• Tax-Free Growth: Your contributions grow tax-free, and you can pull out your original contributions anytime without penalties.
• Education-Friendly: You can access earnings penalty-free if used for qualified education expenses.
• Dual Purpose: If your child doesn’t need the money for school, you’ve still got it earmarked for your retirement.

That said, Roth IRAs have yearly contribution limits ($6,500 per person under 50 in 2024) and income caps, which may make them less accessible for some families.

4. Regular Investment Accounts for College Savings

While a regular investment account obviously doesn’t carry the same tax benefits of a 529 Plan, it is also the most flexible and doesn’t carry any penalty for changing the intended use of the funds. 

• Maximum Flexibility: Unlike 529 plans or ESAs, there are no restrictions on how you use the funds. If your child doesn’t attend college or you have other priorities, you can repurpose the money without penalties.
• No Contribution Limits: You can save and invest as much as you’d like, without the caps imposed by other accounts.
• Wide Investment Options: Regular accounts give you access to a broader range of investment vehicles, from individual stocks to ETFs and mutual funds.
• No Withdrawal Penalties: Withdraw funds whenever needed, for any purpose.

While regular investment accounts don’t offer tax advantages, their unmatched flexibility makes them an excellent complement to other savings strategies. 

How do These Plans Compare to a Custodial Account?

What is a Custodial Account?

A custodial account is a popular type of savings or investment account that an adult—often a parent or guardian (account owner, custodian)—manages on behalf of a minor (beneficiary). These accounts, typically established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), can hold a variety of assets, including cash, stocks, bonds, mutual funds, and even real estate in some cases.

• Ownership: While an adult manages the account, the funds legally belong to the child, who gains full control of the account when they reach the age of majority (usually 18 or 21, depending on the state).
• Financial Flexibility: Unlike 529 plans, custodial accounts are not solely limited to education-related expenses. The funds can be used for any purpose that benefits the child, such as purchasing a car, covering medical expenses, or even funding a hobby.
• Tax Considerations: Earnings in custodial accounts are subject to the “kiddie tax,” where a portion of the income may be taxed at the parent’s rate, depending on the total earnings.
• No Contribution Limits: There’s no cap on how much money you can place in a custodial account, but keep in mind that significant contributions may trigger gift tax implications.

Comparing Custodial Accounts to the 529 Plan and ESA

When deciding between custodial accounts, 529 plans, and Coverdell ESAs, it’s essential to weigh their unique benefits and limitations based on your family’s goals and financial situation.

1 | Flexibility

Custodial accounts shine in terms of flexibility, as they aren’t restricted to education-related expenses. The funds can be used for a wide variety of purposes, including non-academic needs such as buying a car or covering medical bills.

529 plans and ESAs, on the other hand, are specifically designed for educational expenses, with penalties and taxes applied for nonqualified withdrawals. However, 529 plans have seen increased flexibility in recent years, now allowing funds to be used for K-12 tuition, apprenticeship programs, and even a Roth IRA rollover starting in 2024.

2 | Ownership and Control

One significant difference between these accounts lies in control and ownership. With a custodial account, the child becomes the legal owner when they reach the age of majority (typically 18 or 21, depending on the state). This means they have complete discretion over how the funds are spent.

Conversely, 529 plans and ESAs remain controlled by the account holder (usually a parent or guardian), ensuring the funds are used only for their intended purposes.

Tax Benefits

529 plans and Coverdell ESAs are both tax-advantaged accounts, as contributions grow tax-free, and qualified withdrawals for education expenses are also tax-free. Custodial accounts, however, are subject to the “kiddie tax,” which may result in part of the earnings being taxed at the parent’s rate.

Additionally, custodial accounts lack the robust tax benefits of 529 plans and ESAs, which can make a difference in long-term savings growth.

3 | Contribution Limits

Custodial accounts do not have contribution caps, though substantial contributions might trigger gift tax implications. On the other hand, 529 plans can have high contribution limits (often over $300,000 per beneficiary, depending on the state), while Coverdell ESAs cap contributions at $2,000 per child per year, making them more restrictive in terms of annual savings potential.

4 | Suitability

Custodial accounts provide the most financial flexibility, making them a good option for families who value open-ended use of funds and trust their child to manage the money responsibly in adulthood. 529 plans are ideal for families prioritizing education savings with tax benefits and long-term growth potential. Meanwhile, Coverdell ESAs are a niche tool, best suited as a supplement to a 529 plan for those seeking additional tax-advantaged savings for K-12 or college expenses.

What’s the Right Plan for You?

Every family’s needs are unique, and the best strategy often involves a combination of these options. For most families, a 529 plan serves as the backbone of education savings, while options like Coverdell ESAs, Roth IRAs, or regular investment accounts add flexibility and give you peace of mind.

Before making any decisions, it is wise to consult with a qualified tax advisor, financial planner, CPA, or investment manager.

At Towerpoint Wealth, we specialize in helping families like yours navigate these choices and create personalized education savings plans that align with your overall financial goals.

Ready to get started? Let’s map out a smart, personalized education savings strategy for your family’s future!

Frequently Asked College Savings Plans Questions

What is the best savings plan for college?

The best savings plan for college often depends on your family’s unique financial situation and goals. For many, a 529 plan stands out as the top choice due to its tax advantages, high contribution limits, and versatility for educational expenses. These plans are typically managed by a state-appointed program manager, who ensures the investments within the plan are professionally handled and aligned with long-term growth objectives. This makes 529 plans a reliable and efficient option for families looking to maximize their college savings.

What happens to 529 if the child doesn’t go to college?

If the child does not go to college, the funds in a 529 plan can still be used for other qualified education expenses, such as vocational or trade school costs, apprenticeship programs, or even transferred to another qualified beneficiary, such as a sibling. If the funds are withdrawn for non-qualified purposes, the earnings portion of the withdrawal will be subject to income tax and a 10% penalty. However, exceptions to the penalty may apply, such as when the beneficiary receives a scholarship.

In our latest episode of “A Wealth of Knowledge“, Towerpoint Wealth’s original podcast, we dive into the intricate world of private professional fiduciaries. These trusted professionals play a critical part in managing the financial and personal well-being of their clients, often navigating complex legal, financial, and caregiving responsibilities.

Listen to the podcast below!

Here’s a recap of what we discussed – and why this topic is so important.

What’s a Professional Fiduciary?

At its core, a professional fiduciary is someone who is legally and ethically obligated to act in their client’s best interest, 100% of the time. A private professional fiduciary is legally and ethically bound to act in their clients’ best interests, often stepping in when clients lack the ability—or trusted family members-to manage their affairs. Private professional fiduciaries coordinate a wide spectrum of responsibilities, including:

• Financial Management: Overseeing assets, paying bills, and ensuring compliance with legal and regulatory standards.
• Compliance: Ensuring that their duties are fulfilled in adherence to the Uniform Prudent
  Investor Act and CA State Probate Code
• Personal Care: Coordinating healthcare, living arrangements, and quality-of-life decisions for clients who can’t advocate for themselves.
• Estate Administration: Acting as a trustee, conservator, or estate administrator to manage complex estates and legal matters.

Fiduciaries often serve as an objective, neutral third party, ensuring their clients’ needs are met without family conflicts or emotional bias.

Key Highlights From the Episode

This episode featured insightful discussions led by:

• Joseph Eschleman, President of Towerpoint Wealth
• Jonathan LaTurner, Partner and Wealth Advisor
• Megan Miller, Associate Wealth Advisor

Together, they explored the vital role fiduciaries play and how Towerpoint Wealth supports these professionals in their mission to serve clients effectively. This discussion included things like:

1. The Unique Role of Fiduciaries

• Fiduciaries act as a neutral third party, ensuring that estate and financial matters are managed in accordance with their client’s wishes.
• Licensed by organizations like California’s Department of Consumer Affairs and supported by trade groups like the Professional Fiduciary Association of California
  (PFAC), fiduciaries operate under strict legal and ethical guidelines to protect their clients.
• Their roles can range from managing a trust’s investments to ensuring a client receives proper medical care.

2. Why Fiduciaries Are Critical

For clients without suitable family members to oversee their affairs, fiduciaries offer a professional, impartial solution. They:

• Minimize family conflicts by serving as a neutral decision-maker.
• Ensure compliance with legal, ethical, and regulatory standards.
• Manage complex estates and financial responsibilities with expertise and care.

3. Towerpoint Wealth’s Role

As fiduciaries themselves, Towerpoint Wealth offers invaluable support to professional fiduciaries. We understand the unique challenges fiduciaries face. Our role is to empower fiduciaries by helping them manage the financial intricacies of their responsibilities, including:

• Investment Management: Ensuring portfolios align with the Uniform Prudent Investor Act (UPIA).
• Tax Strategies: Offering expert tax advice and coordination with CPAs to optimize financial outcomes.
• Comprehensive Support: Partnering with estate planning attorneys and other professionals to address clients’ diverse needs.

Why This Niche Matters

Fiduciaries wear many hats, often balancing caregiving with financial management and legal oversight. At Towerpoint Weath, we alleviate their workload by handling the financial complexities, allowing fiduciaries to focus on their primary goal: ensuring their clients’ well-being.

What Sets Towerpoint Wealth Apart?

As Jonathan and Megan shared in the podcast, our team’s depth of experience, combined with our unwavering commitment to helping fiduciaries meet their responsibilities with precision, sets us apart. Whether it’s navigating trust requirements or providing tailored investment strategies, we’re here to deliver solutions that make help fiduciaries fulfill their obligations to their clients.

• Decades of Expertise: With over 15 years of fiduciary experience, Jonathan brings a depth of knowledge in asset and estate management. Our team deeply understands the complexities of fiduciary responsibility in accordance with regulations and best practices.
• Tax Strategy Excellence: Megan Miller’s credentials as an Enrolled Agent allow us to provide comprehensive tax advice.
• Ongoing Support and Communication: We prioritize regular updates and are always available to address questions and provide advice, ensuring fiduciaries feel supported every step of the way.
• Dedication to Learning: Our team is committed to continuous education, staying informed on the latest developments and regulations to ensure we provide fiduciaries with the most accurate and actionable guidance.
• Passion for Service: Our team is dedicated to educating fiduciaries and empowering them to achieve the best outcomes for their clients.

Connect With Us!

If you’re a private professional fiduciary or interested in learning more about this fascinating field, we invite you to:

• Subscribe to Our Fiduciary Focus Newsletter for curated content tailored to your needs.
• Follow us on Instagram, LinkedIn, and Facebook for the latest updates.
• Visit our website at Towerpoint Wealth for additional resources.

Stay tuned for more episodes of A Wealth of Knowledge, where we’ll continue to explore financial strategies, wealth management insights, and more. Don’t forget to like, share, and subscribe to ensure you never miss an episode!

How Retirement Income Planning for Retirement Can Give You the Confidence to Spend

After dedicating a good portion of your life to earning and saving, the idea of spending in retirement can feel like you’re doing something wrong and depleting your savings.

According to Retirable.com, only 41% of near-retirees are confident in their month-to-month spending in their current state and moving into retirement! It’s not uncommon for retirees to wonder, “Am I doing enough to make my savings last?” or “How much can I spend in retirement?” While these feelings are natural, they often create hesitation and prevent retirees from fully enjoying the financial freedom they’ve worked so hard to achieve.

The reality is that transitioning from saving to spending is more than just a financial adjustment — it’s an emotional one. Fear of running out of money, uncertainty about future market performance, and even a lifetime of frugality can make it difficult to shift gears and embrace the freedom retirement brings.

At Towerpoint Wealth, we see this all the time: retirees who are so used to building their nest egg that they struggle to feel confident in spending it, even when their financial plan suggests they can. But here’s the good news: with the right income planning for retirement, you can face these challenges head-on and gain the confidence to live the retirement you’ve envisioned.

In this article, we’ll explore why spending in retirement can feel so hard, the importance of a sustainable retirement income plan, and practical strategies to align your spending with your goals. Whether you’re just entering retirement or are already in it, the key is finding the right balance between financial security and enjoying the life you’ve earned.

Key Takeaways

• Spending in retirement requires a strategy for overcoming emotional barriers and personalized income planning for retirement.
• A sustainable retirement income plan ensures financial security while allowing you to enjoy the lifestyle you’ve earned.
• Balancing growth investments like equities with less risky investments like bonds and cash can help protect your portfolio from market volatility.
• Working with a seasoned financial advisor helps address retirement fears, optimize investments, and align spending with your longer-term goals.

Why Does Spending in Retirement Feel So Difficult?

While we typically think of retirement and the significant shift in lifestyle, retirement also marks a new direction in your financial habits. For decades, you’ve been focused on building your savings, diligently setting aside a portion of your income to secure your future, and following your financial plan. Transitioning to spending that hard-earned nest egg can feel like stepping into uncharted territory, and for many retirees, it’s an emotional hurdle as much as a financial one.

Psychological Barriers to Retirement Spending

One of the biggest challenges retirees face as they approach their golden years is overcoming the fear of running out of money.

This concern is rooted in uncertainty — both about how long retirement will last and whether your savings can sustain unexpected expenses like healthcare or market downturns. For some, the thought of depleting savings can feel like losing a safety net they’ve spent years building.

There’s also typically a mindset barrier when transitioning from saving to spending. For many, saving is associated with responsibility and prudence, while spending can feel indulgent or even reckless. These deeply ingrained habits and beliefs can make retirees hesitant to enjoy the wealth they’ve worked so hard to accumulate.

Longevity and Uncertainty

We’re living longer than ever, which is both a blessing and a challenge when it comes to retirement planning.

The prospect of living to 95 or even 100 means retirees must plan for decades of expenses, often leading to overly conservative spending habits. Questions about potential economic downturns and outliving money can create anxiety and cause retirees to underspend, even when their financial plan shows they can afford to enjoy more.

Because of these concerns, studies consistently show that retirees tend to withdraw far less from their savings than they safely could. While many financial advisors recommend a 4% withdrawal rate to sustain retirement income, research shows that the average retiree withdraws only 2.1% annually. This cautious approach often leaves money on the table, money that could have been spent on meaningful experiences like travel, hobbies, or family.

At Towerpoint Wealth, we understand these concerns and help our clients address them head-on by creating a defined and sustainable retirement income plan and showing them exactly how much they can spend without feeling guilty or anxious.

The Importance of Income Planning for Retirement

The key to overcoming fears about spending in retirement lies in preparation. Retirement income planning isn’t just about figuring out a retirement budget — it’s about creating a strategy that gives you confidence in your financial future and helps you align your spending with your goals.

A well-thought-out retirement income plan, along with making sure you have enough set aside to retire, ensures you can enjoy the lifestyle you’ve worked so hard to build without worrying about running out of money.

Want to make sure you have enough to retire? Check out our free white paper, ‘Is $2 Million Enough to Retire?‘, which provides an in-depth look at how to evaluate your savings and determine whether your financial plan aligns with your goals.

What Is Retirement Income Planning?

Retirement income planning is a key component of financial planning for retirees, helping with the transition from saving to spending with a sustainable strategy for managing your nest egg. It considers all of your sources of income, anticipated expenses, and longer-term goals to ensure you can maintain financial security throughout retirement.

Unlike your working years, when income typically comes from a steady paycheck, retirement income often comes from multiple sources, including Social Security, pensions, investment accounts, and annuities. Balancing these sources while accounting for important factors like taxes, inflation, and market volatility, is critical to making your money last.

Key Components of a Sustainable Retirement Income Plan

Assess Your Expenses:

Start by breaking down your retirement budget into essential expenses (e.g., housing, healthcare, utilities) and discretionary expenses (e.g., travel, hobbies, gifts). Knowing how much you need to cover your fixed costs provides a baseline for how much income you’ll need to cover necessities while accounting for discretionary spending lets you enjoy retirement to the fullest.

Determine a Withdrawal Strategy:

Establish a reasonable withdrawal rate, using techniques such as the 4% rule, as a starting point. This rule has historically allowed retirees to sustain their savings over a 30 or even 40-year retirement. Alternatively, you may want to consider guardrails or dynamic withdrawal strategies that adjust based on market conditions and your personal needs.

Incorporate Guaranteed Income Sources:

Cover essential expenses with predictable income streams like Social Security, pensions, or annuities. Studies show that retirees with guaranteed income are more likely to spend confidently, since they know their basic needs are secure.

Account for Inflation and Taxes:

Over time, the cost of living rises, and your income plan must account for inflation if you want to preserve your purchasing power. Taxes on withdrawals from retirement accounts such as traditional IRAs or 401(k)s must also be factored into your spending plan.

The Benefits of Income Planning for Retirement

With a clear income plan in place, you can move beyond the uncertainty of retirement spending and focus on what matters most: enjoying this new phase of your life. Income planning not only provides peace of mind but also empowers you to spend in ways that align with your priorities, whether that’s traveling, pursuing hobbies, or spending time with family.

It’s important that you work with a trusted financial advisor to create an income plan that suits you and your preferences.

At Towerpoint Wealth, we specialize in helping retirees design personalized income plans that balance financial security with the freedom to live fully. By addressing your unique needs and goals, we work with you to create a roadmap for retirement spending that feels both sustainable and fulfilling.

Overcoming Retirement Fears

For many retirees, fear is the biggest barrier to fully enjoying their savings. Concerns about running out of money, unexpected expenses, or leaving a legacy often lead to overly cautious spending. While these fears are valid, they don’t have to define your entire retirement experience.

Common Fears

• Longevity Risk: The fear of outliving savings can cause retirees to underspend, even when they have a solid financial plan.
• Uncertainty: Healthcare costs, market fluctuations, and emergencies can create anxiety about financial stability.
• Identity Shifts: Decades of frugality can make spending feel irresponsible, even when it’s aligned with personal goals.

Retirement is the time to enjoy the life you’ve built. By focusing on what brings you joy — whether it’s travel, hobbies, or family – you can align your spending with your values and move past hesitation.

Shifting Your Mindset

Overcoming these fears often starts with reframing how you think about money and retirement.

Saving is a virtue, but spending in alignment with your values is just as important. Retirement is the time to enjoy the life you’ve built – traveling, pursuing hobbies, or creating memories with loved ones.

Ask yourself:

• What do I value most in this stage of my life?
• What experiences or goals would bring me the most joy and fulfillment?

Answering these questions can help you identity areas where spending aligns with your priorities, making it easier to let go of fear and embrace purposeful spending.

Practical Strategies for Spending in Retirement

Transitioning from saving to spending in retirement requires more than just a mindset shift; it also calls for practical strategies to ensure your spending aligns with your financial goals. By implementing a thoughtful approach, you can enjoy your wealth without fear of outliving it.

Build a Flexible Budget

Establish a retirement budget that sets a clear distinction between essential and discretionary expenses. This allows you to cover necessities like housing, healthcare, and utilities with

guaranteed income sources such as Social Security or pensions, and allocate savings or investments toward discretionary items like travel, hobbies, or gifts.

Segment Your Savings

Dividing your retirement savings into purpose-driven buckets can make spending feel more manageable and intentional. You can set aside funds for travel and experiences in one account and allocate money for emergencies or healthcare in another. This approach provides clarity and helps you feel more confident about using your savings for specific goals.

Engage in Meaningful Activities

Retirement offers the perfect opportunity to explore passions, stay socially connected, and give back. Consider:

• Pursuing hobbies like gardening, art, or learning a new skill.
• Volunteering or mentoring to create purpose and contribute to your community.
• Spending quality time with loved ones, such as family gatherings or trips with grandchildren.

If you’re not ready to fully step away from work, you can also consider part-time roles or consulting in your field to provide both intellectual engagement and financial benefits in retirement.

Revisit Your Plan Regularly

Your retirement isn’t going to be static – market conditions, inflation, and your personal goals may change. Regularly review your spending and income plan with your financial advisor to ensure it stays aligned with your needs and adapts to any new circumstances.

Embrace Small Luxuries

Allow yourself to enjoy the little things that bring you joy. Whether it’s an upgraded vacation or treating yourself to a new hobby, spending on what matters to you can enhance your retirement experience while staying within your plan.

The Role of Investing in Retirement

Even in retirement, your investment strategy remains a critical component of financial security.

While the focus often shifts from growing wealth to preserving it, knowing how to invest in retirement and maintaining a balanced approach to investing ensures your savings continue to support your lifestyle and long-term goals.

Balancing Growth and Stability

In retirement, it’s essential to strike a balance between growth and stability. While you want to protect your nest egg, some exposure to growth-oriented investments – such as equities and dividend-paying stocks — may help your portfolio keep pace with inflation and avoid the risk of outliving your savings.

On the other hand, stability investments, including bonds, Treasury Inflation-Protected Securities (TIPS), and other fixed-income assets, offer lower risk and predictable returns, helping to cushion against market volatility.

Adjusting Asset Allocation

Your asset allocation is a core aspect of financial planning for retirees, ensuring your mix of stocks, bonds, and other investments aligns with your income needs and risk tolerance. Your financial advisor can help you periodically reassess your allocation to ensure it aligns with your current situation and future goals.

Generating Retirement Income

Investments can serve as an important source of income in retirement, complementing Social Security and pensions. Consider strategies like investing in dividend-paying stocks and creating a plan for systematic withdrawals to help you draw from your portfolio without compromising its longevity.

Tax-Efficient Investing

Retirees must also consider the tax implications of their investments. Using strategies like Roth conversions, tax-loss harvesting, and proper asset location (placing tax-efficient investments in taxable accounts and tax-inefficient ones in retirement accounts) can potentially help reduce your overall tax burden.

Planning for Market Volatility

While market fluctuations are inevitable, having a diversified portfolio and a flexible withdrawal strategy can help minimize their impact on your financial plan. Staying focused on your long-term goals is a key practice to help weather short-term volatility.

The Bottom Line

Retirement is a time to celebrate your accomplishments and embrace the freedom to live life on your terms. While transitioning from saving to spending can feel challenging, having a sustainable income plan and clear financial strategy can replace your retirement fears with confidence.

Whether it’s prioritizing meaningful activities, managing investments, or aligning spending with your values, the key is to create a retirement that is both secure and fulfilling. With the right guidance, you can focus on what matters most — enjoying the life you’ve earned.

At Towerpoint Wealth, we specialize in helping retirees like you navigate this transition with personalized strategies and ongoing support. If you’re ready to take the next step toward a confident and purposeful retirement, we invite you to schedule a consultation with our team today.

The recent fires in Los Angeles have highlighted the devastating toll wildfires can take on our communities. At Towerpoint Wealth, these fires have hit especially close to home.

Our Advisor and Partner, Jonathan LaTurner, has family living in Southern California, and while we are incredibly grateful that Jonathan’s brother-in-law, Hunter LaTurner, and his family were spared, their neighborhood and countless others were not as fortunate. Below, you’ll see a photo comparison: A photo of Hunter’s home is on the left, and his direct next-door neighbor’s home is on the right.

California’s wildfire season continues to disrupt and devastate, leaving families without homes and in urgent need of support. As we process the impact of these fires and ask what we can do to help, we are reminded of the importance of standing together in times of crisis. At Towerpoint Wealth, we are committed to helping those affected by contributing to disaster relief efforts and encouraging others to do the same.

Making a Difference Together

In addition to financial contributions, Jonathan and his wife, Katie, are organizing a donation drive to support families displaced by the fires, We’re collecting the following items:

• Gently used clothing
• Toiletries and hygiene products
• Kids’ toys and books
• Household essentials (bedding, kitchen items, etc.)
• School supplies

These donations will go directly to families in need, offering tangible support as they begin to rebuild their lives. For more details on how to contribute, please contact us directly.

We Are Doubling Your Impact

Families affected by these fires need your help now more than ever. Every moment counts in providing relief and comfort during this critical time.

To amplify our collective efforts, Towerpoint Wealth will match dollar-for-dollar any donation made by our Trending Today readers, up to $10,000. This initiative is our way of doubling your support and ensuring that relief efforts reach as many people as possible

Ways You Can Help

If you are looking for organizations to contribute to, here are two impactful ones leading wildfire efforts:

1 | The California Community Foundation’s Wildfire Relief Fund

For over 20 years, this fund has supported wildfire recovery efforts, focusing on rebuilding homes, providing mental health services, and assisting low-income communities.

How to Donate

Vist calfund.org/wildfire-relief-fund to contribute

2 | The Los Angeles Fire Department Foundation

The LAFD Foundation supports firefighters and first responders battling wildfires with life-saving equipment, training, and resources.

How to Donate

Visting supportlafd.org to make a donation

Coming Together as a Community

Assisting those affected by the Los Angeles wildfires reminds us of the strength found in unity and resilience. The bravery of first responders, volunteers, and community members who rally to support those in need cannot be overstated. We would like to thank all donors who are coming together to support the recovery efforts for those who have lost their communities.

At Towerpoint, we believe in the power of collective action. Whether it’s through financial contributions, volunteering, or spreading awareness, every effort makes a difference. Together, we can help those affected by these fires rebuild and begin to look toward a brighter future.

If you would like to join us in these efforts or learn more about our commitment to supporting wildfire disaster relief, please don’t hesitate to reach out. Let’s stand together for Los Angeles during this challenging time.

Understanding The National Debt, the US Debt-to-GDP, and Why It Matters for Investors

The U.S. national debt has soared to an unprecedented $35 trillion, growing by an alarming $2 trillion every year! 

The growth of the federal debt regularly dominates the headlines, raising questions about the nation’s fiscal health and the debt’s potential impact on our economic stability. For investors, this escalating debt isn’t just a number in the news — it’s a factor that can shape market conditions, interest rates, and portfolio performance.

While the sheer size of the debt is concerning, it’s important to keep a focus on its sustainability. The key lies in understanding how the cost of servicing this debt — measured as a percentage of Gross Domestic Product (GDP) — can affect government policy, economic growth, and market stability. 

Historically, low interest rates have shielded policymakers from feeling the full impact of rising debt, enabling expansive spending with limited fiscal restraint, but those days seem to be over. With interest burdens now returning to levels last seen in the 1990s, the U.S. faces a critical turning point.

As the global leader and issuer of the world’s reserve currency, the United States holds significant economic advantages. However, these advantages depend on responsible debt management and maintaining confidence in the dollar’s strength. The erosion of this confidence could have profound implications for global markets, economies, and investment strategies.

In this article, we’ll break down the current state of the U.S. national debt burden, examine how it impacts the value and role of the U.S. dollar in the global economy, and provide insights into what this might mean for your portfolio. By staying up-to-date and practicing proactive planning, you can navigate these challenges and position your investments for long-term success.

Key Takeaways

• The U.S. national debt has surpassed $35 trillion in 2024, with a debt-to-GDP ratio exceeding 123%, signaling rising fiscal pressures that influence market dynamics and investment strategies.
• Higher interest rates and inflation, driven by the growing debt, can impact bond yields, the stock market, and purchasing power, requiring proactive portfolio adjustments.
• Investing in global markets and inflation-protected investments can offer opportunities to hedge against domestic economic uncertainties and capitalize on broader growth trends.
• Diversification, tax-efficient strategies, and a longer-term perspective are essential for navigating the challenges of the U.S. national debt while positioning your portfolio for resilience and success.

Understanding the Current State of the U.S. Debt Burden

The best way to understand the U.S. national debt isn’t just by looking at the massive top-line figure, but by focusing on the U.S. debt-to-GDP ratio — a measure of how the federal debt compares to the size of its economy. Currently, the U.S. debt-to-GDP ratio is 123%, indicating that the country owes more than its entire annual economic output. 

For context, this ratio has grown steadily over decades, fueled by government spending, tax cuts, and historically low interest rates. The Congressional Budget Office (CBO) predicts that the federal government debt will continue to outpace the nation’s economic growth.

Breaking Down the National Debt: What Investors Need to Know

The U.S. debt is divided into two main categories:

• Debt Held by the Public: This includes Treasury securities and bonds owned by individuals, corporations, state and local governments, and foreign governments. It represents the debt that directly influences markets and interest rates. Most of the domestically held public debt is owned by the Federal Reserve.
• Intragovernmental Debt: Debt held by government trust funds, like Social Security and Medicare, which reflects the government’s internal financial obligations.

For you, as an investor, public debt is especially important because it impacts everything from interest rates to inflation to fiscal policy — all of which shape broader market conditions, and can affect your portfolio’s performance.

The Rising Cost of Borrowing

For years, low interest rates helped keep borrowing costs manageable, even as the debt grew; however, that is no longer the case. In fiscal year 2023, net interest payments on the national debt rose to 2.4% of GDP, and projections suggest future interest payments could reach 3.0% in 2024 — the highest levels since the late 1990s. This spike in the debt limit, or debt ceiling, limits the government’s ability to invest in other priorities, potentially creating ripple effects across the economy.

For investors, rising interest rates can mean higher yields on bonds, but they also signal potential challenges for equity markets and economic growth. Understanding interest rates and how they affect the stock market is crucial for investors to optimize their portfolios to efficiently navigate the market — and it is equally important for policymakers to understand the role of interest rates in their policy decisions.

Why the Federal Debt Matters

The U.S. national debt isn’t just a government issue, it’s an economic reality that can affect everything from the value of the U.S. dollar to the performance of investments. As debt levels climb, so does the cost of servicing it, which poses challenges for fiscal policy and financial markets alike.

The Debt-to-GDP Ratio: A Benchmark of Fiscal Health

Think of the debt-to-GDP ratio as a metric similar to the nation’s “credit score.” A high ratio signals that debt is growing faster than the economy, which can erode confidence in the government’s ability to manage its obligations. While the U.S. is not at the level of an economic fallout (like that of Argentina), this rising ratio seems to underpin our need for sustainable fiscal policies.

For investors, a high debt-to-GDP ratio can have real-world implications:

• Rising Interest Rates: As debt levels grow, so does the cost of servicing that debt. This puts upward pressure on interest rates, which affects everything from bond yields to borrowing costs for businesses and consumers.
• Reduced Fiscal Flexibility: Higher interest payments consume a larger portion of the federal budget, limiting the government’s ability to invest in growth-driving initiatives like infrastructure, research, and education.

The U.S. Dollar and Global Confidence

The U.S. dollar’s status as the world’s reserve currency is a cornerstone of its economic power. Since World War II, this privileged position has allowed the U.S. to borrow at lower costs and maintain a dominant role in global trade and finance. However, the rising national debt poses risks to this standing.

As debt levels grow and the debt-to-GDP ratio climbs, global confidence in the dollar could weaken. If investors or foreign governments begin to question the U.S.’s ability to manage its fiscal responsibilities, demand for the dollar could decline, potentially leading to currency depreciation, reducing purchasing power and making imported goods more expensive, and higher borrowing costs, further increasing the cost of debt.

Impacts on Economic Growth

Growing national debt, as seen through historical trends in U.S. debt by the year, also has broader implications for economic growth. When the government borrows heavily, it competes with businesses and individuals for available capital. This can drive up interest rates and reduce private-sector investment, which is critical for innovation and job creation. 

Persistent deficits and high debt levels can also contribute to inflation, eroding the real value of investments and reducing the purchasing power of households like yours.

Why This Matters to Investors

The federal debt directly influences market dynamics and portfolio performance. Rising interest rates, inflation, and economic uncertainty all affect asset values and investment returns. Understanding these factors can help you make informed decisions about how to allocate and diversify your investments, manage risk, and position your portfolio for resilience.

By staying proactive and working with a trusted financial advisor, you can navigate the challenges posed by the national debt and identify opportunities that align with your financial goals. At Towerpoint Wealth, we examine a myriad of market factors to help our clients navigate volatility and make informed decisions that align their investment strategies with their unique risk tolerance and financial goals.

Implications of National Debt for Investors

The growing national debt has far-reaching consequences that extend beyond the federal budget and the U.S. dollar. As discussed, when it comes to investors, the national debt directly impacts market dynamics, investment returns, and portfolio strategies. Understanding these implications can help you navigate the challenges and opportunities presented by today’s fiscal environment.

Rising Interest Rates and Bond Yields

As the government’s borrowing needs grow, it often raises interest rates to attract buyers for its debt. Higher interest rates can have a dual impact on your portfolio:

• Bond Markets: Rising rates typically lead to lower bond prices, which can negatively affect existing fixed-income investments. However, new bonds offer higher yields, creating investment opportunities for income-focused investors.
• Equity Markets: Higher interest rates increase borrowing costs for businesses, potentially slowing growth and reducing profitability, which may weigh on stock valuations.

Inflation and Purchasing Power

A growing debt burden, coupled with high inflation, erodes purchasing power. This can impact your portfolio by reducing the real value of investment gains, particularly for fixed-income assets. It can also affect inflation-sensitive sectors. While energy and commodities may see higher demand, others, such as consumer goods, may struggle with rising input costs.

Market Volatility

The growing national debt and its economic implications often contribute to heightened market volatility. As government borrowing increases and fiscal policies evolve, investors may experience more frequent and pronounced market swings. While this uncertainty can be unsettling, it also creates opportunities for those who are prepared.

To manage market volatility, it’s important to remember two key cornerstones of sound financial planning:

• Diversification: Spreading investments across asset classes and geographies to reduce risk.
• Long-Term Perspective: Staying focused on financial goals despite short-term fluctuations.

Opportunities in Global Markets

A rising U.S. national debt and the potential weakening of the dollar can create opportunities for investors to diversify internationally. When the dollar depreciates, foreign investments often gain value when converted back into U.S. dollars, enhancing overall returns. Additionally, global markets, particularly in emerging economies, may offer higher growth potential compared to the more mature U.S. market.

Key Strategies for Global Investing

• International Equities: Ask your financial advisor about established companies in developed markets or high-growth industries in emerging economies.
• Foreign Bonds: Consider diversifying fixed-income holdings with bonds from stable or growing foreign markets.
• Global ETFs and Mutual Funds: Look into simplified international investing with funds that offer broad exposure to global opportunities.

Proactive Strategies for Navigating the National Debt

As we have discussed, the growing U.S. national debt presents a complex challenge for the economy and financial markets. With the right strategies, however, investors can mitigate potential risks while capitalizing on new opportunities. Proactive planning, diversification, and informed decision-making are essential for navigating this evolving landscape. 

Here’s what that may look like for investors like you:

Diversify Across Asset Classes and Geographies

Diversification remains one of the most effective ways to reduce portfolio risk, particularly in an environment of economic uncertainty driven by rising debt. 

By allocating investments across various asset classes — such as equities, bonds, real estate, and alternatives — you can minimize the impact of market volatility on your overall portfolio. Diversifying globally can also provide exposure to international markets, which may benefit from a weaker U.S. dollar and offer higher growth potential in emerging economies.

Prepare for Inflation

High national debt levels often contribute to inflationary pressures, which can erode purchasing power and reduce real returns on investments. To protect your portfolio from inflation:

• Consider Investing in Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) and commodities, such as gold, can provide a hedge against rising prices.
• Consider Real Assets: Investments in real estate, commodities, and infrastructure often perform well in inflationary environments, offering both present income and potential appreciation in the future.

Optimize Fixed-Income Investments

Rising interest rates — a common consequence of increasing debt — can negatively affect existing bond prices; however, it can also create opportunities for new fixed-income investments. Investing in shorter-duration bonds, for example, can provide stability, as these are less sensitive to rate changes. Newly issued higher-yield bonds are another way to increase your income while balancing risk

Leverage Tax-Efficient Strategies

As the government addresses its debt, tax policy changes may follow, making tax efficiency a critical component of your financial plan. Some strategies to consider are:

• Maximize Tax-Advantaged Accounts: Contributions to IRAs, 401(k)s, and Health Savings Accounts (HSAs) defer or eliminate taxes on investment growth.
• Implement Tax-Loss Harvesting: Offset capital gains by strategically selling underperforming assets, reducing your taxable income.

Stay Focused on Your Longer-Term Goals

Short-term volatility caused by debt-related market fluctuations can be unsettling, but maintaining a disciplined, long-term perspective is the key to long-term wealth. Performing regular portfolio reviews with your financial advisor can help make sure you periodically reassess your asset allocation and risk tolerance to stay in alignment with your plan and with your goals.

Final Thoughts

The rising U.S. national debt is a complex issue, with historical data on U.S. debt by the year providing critical insights into its accelerating growth. 

This increasing debt has significant implications for the economy, markets, and your investments. While challenges like inflation, rising interest rates, and market volatility may feel daunting, they also present opportunities for proactive and informed investors.

By diversifying globally, protecting against inflation, leveraging tax-efficient strategies, and staying focused on long-term goals, you can position your portfolio for resilience and growth in an uncertain economic landscape.

At Towerpoint Wealth, we’re here to help you navigate these complexities with personalized strategies tailored to your risk tolerance and financial objectives. If you’re ready to take control of your financial future in the face of today’s challenges, we invite you to schedule a consultation with our team. Together, we can build a plan that helps you thrive, regardless of what the future holds.

Year-end tax moves to position you for success!

As the holiday season fills the air with giving and gratitude, it’s also the perfect time to give yourself the gift of proactive financial planning and minimizing your tax obligation to Uncle Sam. With 2025 on the horizon, the tax landscape may see significant shifts that could impact your financial goals. But the good news? There are things you can do today that can set you up for a more effortless, and less costly, tax season next year.

At Towerpoint Wealth, we believe the best gifts are the ones that keep giving, like a well-structured financial plan tailored to help you minimize your taxes and maximize wealth-building and wealth-protecting opportunities. That’s why this holiday season, we’re sharing six powerful year-end tax moves that you can consider to help you be better prepared for 2025. 

So, as you enjoy the festivities and reflect on the year ahead, take a moment to unwrap these valuable insights and talk with your tax and financial advisor about ways that you can minimize your tax liability as you prepare for the new year.

Key Takeaways

• Proactive tax planning is essential, as small adjustments made now can help reduce your tax burden and set the stage for long-term financial success.
• With the Tax Cuts and Jobs Act (TCJA) set to potentially expire, preparing for potential higher tax rates and a reduced standard deduction may be a critical step in maintaining financial stability.
• Strategies like Roth conversions and tax-loss harvesting offer effective ways to minimize taxes and increase financial flexibility for the future.
• Optimizing “asset location” by placing tax-inefficient investments in the most tax-efficient accounts can significantly reduce tax drag and enhance portfolio growth over time.
• Reviewing your estate plan now allows you to take advantage of the current estate tax exemption before potential reductions occur in 2025.

Manage Capital Gains Distributions

Capital gains distributions can be an unwelcome surprise during tax season, particularly for investors holding mutual funds in taxable accounts. These distributions happen when fund managers sell securities within a fund at a profit and pass those taxable gains to investors, even if you haven’t sold a single share. 

The result? A potentially unexpected tax bill that can feel especially frustrating in years when you haven’t sold anything, and/or the market or your portfolio is down.

At Towerpoint Wealth, we see this as an opportunity to take proactive steps that reduce the “tax drag” on your portfolio. By shifting investments prone to capital gains distributions into tax-advantaged accounts like IRAs or 401(k)s, you can defer taxes and keep more of your money growing. Another approach is to favor tax-efficient investments like ETFs or tax-managed mutual funds,which are designed to generate fewer taxable events, in your non-retirement, “regular” investment accounts. 

This is why we regularly review client portfolios to identify and address these hidden tax inefficiencies. By making thoughtful adjustments, we ensure that investments are not just growing, but doing so as tax efficiently as possible. Managing capital gains distributions isn’t just about avoiding surprises right now, but also optimizing your strategy to support your longer-term goals.

Prepare for the TCJA Expiration

The Tax Cuts and Jobs Act (TCJA) introduced in 2017, brought major changes to the U.S. tax code, including lower tax brackets, a doubled standard deduction, and an expanded Child Tax Credit. However, many of these provisions are set to expire at the end of 2025, potentially resulting in higher taxes for individuals and families.

For investors, this potential expiration represents a critical window of opportunity. Strategies such as accelerating income to take advantage of today’s current lower tax rates, or making larger charitable contributions in the future (when tax rates may be higher), can help mitigate the impact of future changes. It’s also a good time to review all of your available tax deductions, like those for medical expenses or state and local taxes, to maximize the benefits before thresholds potentially shift, or after!

Being mindful of how these changes could affect your tax liability is key to staying on course with your financial goals. With the clock potentially ticking on the TCJA, thoughtful adjustments today can make all the difference in reducing your tax burden and keeping your plan aligned with the future.

Consider Roth IRA Conversions: Lock in Lower Tax Rates Now

Roth IRA conversions are a powerful strategy for managing taxes — both now and in retirement. By converting funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount today, but your future withdrawals, including earnings, are tax-free. This can be particularly advantageous if you expect tax rates to rise after the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025.

For many investors, partial Roth conversions — spreading the tax impact of a Roth conversion strategy over several years — offer a balanced approach. This strategy allows you to manage the tax impact of any Roth conversions on a year-by-year basis, while taking advantage of today’s lower tax rates. Plus, it gives you more flexibility to structure your retirement income in a way that minimizes your lifetime tax burden.

As with any financial decision, a Roth conversion certainly isn’t one-size-fits-all. To get the best result, you want to work with your tax and financial advisor to weigh factors like your current tax bracket, retirement timeline, and overall personal and financial goals to determine whether this move is the best option for your strategy. 

By planning now, you can use the next few years to lock in tax savings and position yourself for greater financial flexibility in retirement.

Review Your Estate Plan

The Tax Cuts and Jobs Act (TCJA) didn’t just affect income taxes — it also significantly increased the federal estate tax exemption, allowing individuals to transfer up to $13.61 million to heirs, tax-free, in 2024. However, if the TCJA sunsets at the end of 2025 as scheduled, this exemption could be cut in half, exposing more estates to taxes.

For families looking to preserve generational wealth, now is the time to revisit your estate plan. Considering gifting assets to heirs while the exemption is higher can lock in today’s favorable limits. Alternatively, certain types of trusts can be a powerful tool for efficiently transferring wealth while protecting assets from unnecessary taxation.

Even if you don’t expect to exceed the current or reduced estate tax exemption limits, reviewing your estate plan every five or six years helps to ensure that it reflects your financial goals and family’s needs is an excellent idea. 

Proper estate planning isn’t just about minimizing taxes; it’s about creating a lasting financial legacy that provides economic security for the next generation. Taking action now can help you make the most of the opportunities available to you before they potentially change.

Utilize Tax Loss Harvesting

Tax-loss harvesting is a popular and particularly effective strategy for managing your tax liability and optimizing your portfolio. 

By selling investments that have declined in value, you can use the losses to offset taxable gains from other investments. If your total realized losses exceed your total realized gains, you can even offset up to $3,000 of ordinary income annually, and also carry forward any additional losses to use in future tax years.

This strategy can be particularly impactful when markets are volatile; however, timing is key. Many investors wait until the end of the year to harvest losses, only to find fewer opportunities or risk violating the wash-sale rule, which prevents you from repurchasing the same or a substantially identical investment within 30 days. A year-round approach to tax-loss harvesting makes sure that you’re capturing opportunities as they arise throughout the year, rather than scrambling to “loss harvest” only in December.

By integrating tax-loss harvesting into your overall financial plan, you can not only reduce your tax burden, but also keep your portfolio aligned with your investment goals. It’s a smart way to turn market challenges into advantages while staying proactive in managing your wealth. 

Optimize Your Asset Location

Not all investments are created equal when it comes to taxes, and the type of account in which you hold them can significantly impact your overall returns. This is where asset location comes into play — a strategy that involves placing investments in accounts that offer the most favorable tax treatment for each asset class. 

By aligning assets with the appropriate account types — taxable, tax-deferred, or tax-exempt — you can increase your after-tax returns, reduce tax liabilities, and support your portfolio’s longer-term financial growth. 

For example, interest income from many bonds is typically taxed at ordinary income rates, while qualified dividends and long-term capital gains benefit from lower tax rates. Strategically positioning investments based on their tax characteristics allows you to optimize portfolio tax efficiency, and minimize the drag of taxes on your overall wealth. 

Strategies for Effective Asset Location

• Tax-Advantaged Accounts: Hold tax-inefficient investments, such as taxable bonds and real estate investment trusts (REITs) in tax-deferred accounts like traditional IRAs or 401(k)s. This approach allows interest and dividends to grow without immediate tax implications.
• Taxable Accounts: Allocate tax-efficient investments, such as index funds and municipal bonds, to taxable accounts. These assets typically generate income that is taxed at lower rates or may be tax-exempt, reducing the overall tax burden.

Asset location can be an effective strategy when used correctly; however, it requires a thorough understanding of your financial profile, tax situation, and investment time horizon. Regular portfolio reviews and adjustments with your tax and financial advisor are essential to ensure that your asset location strategy remains aligned with your financial goals and changing tax laws.

Final Thoughts

As the year winds down and the promise of 2025 comes into view, now is the perfect time to take a proactive approach to your financial future. Taxes are an inevitable part of life and a “necessary evil,” but they don’t have to derail your plans. 

By leveraging strategies like managing capital gains distributions, preparing for the TCJA expiration, considering Roth conversions, reviewing your estate plan, utilizing tax-loss harvesting, and optimizing asset location, you can reduce unnecessary tax burdens and position yourself for success in the year ahead.

The key to effective tax planning is preparation and thoughtful strategy. Small, intentional adjustments today can have a material impact on your longer-term financial health. Whether you’re focused on your portfolio’s tax efficiency, reassessing your retirement goals, or ensuring your legacy is protected for future generations, each move you make today is a step toward building greater stability in your retirement.

If navigating the complexities of these strategies feels overwhelming, remember that our counsel, care, and expertise are always within reach. At Towerpoint Wealth, we work with our clients year-round to optimize their portfolios for both their financial goals and tax considerations.
This holiday season, consider giving yourself the ultimate gift: economic peace of mind and a disciplined plan for the year ahead. If you want to make sure you’re covered for 2025 — and beyond — we encourage you to schedule an initial 20-minute “Ask Anything” discovery call with us.

As you build your retirement nest egg, you’re probably wondering if you have enough set aside to fund the lifestyle you crave in your “golden years”.

You’ve worked your entire life to grow your wealth and to enjoy the fruits of your labor in retirement, so the last thing you want as you progress into that next phase of your life is not to have enough money to retire and enjoy this time of peace and leisure. 

The key is to ensure that the money you’ve accumulated can provide for your needs throughout retirement, allowing you to live comfortably without the fear of outliving your savings.

It’s said that a million dollars is NOT enough for most to retire comfortably, which begs some questions: How much money do I need to retire? Can I retire on 2 million dollars? 

Well, that depends… on many things. While $2 million can be a solid foundation, determining if it’s truly sufficient for a comfortable retirement depends on multiple factors like your lifestyle, healthcare needs, and investment strategy.

A 2023 survey from Schwab Retirement Plan Services found that the average worker expects to need roughly $1.8 million to retire comfortably… but it’s possible that you don’t know what to do with 2 million dollars, or what a 2 million retirement looks like!

That’s why, in this article, we’re going to break down the 5 steps to help you gauge whether you can retire on $2 million and what you can do to make it last, with helpful resources to make your retirement planning more attainable. 

Step 1: Assessing Your Financial Situation
Step 2: Setting Realistic Retirement Goals
Step 3: Invest Wisely to Reach Your Retirement Goal
Step 4: Planning for Healthcare Costs
Step 5: Creating a Sustainable Withdrawal Strategy

Step 1: Assessing Your Financial Situation

The first and most crucial step in determining whether you can retire on $2 million is to assess your current financial situation. This starts by taking inventory of your stock of your assets, liabilities, income streams, and overall financial health. By understanding where you stand financially, you can work to identify any gaps or areas that may need to be addressed.

Evaluate Your Assets

Start by listing your assets. This includes things like savings accounts, investment portfolios, real estate, and other valuable possessions. This will give you a clear picture of your net worth and how close you are to achieving your retirement goal.

Review Your Liabilities

Next, you want to take a close look at all of your liabilities, such as outstanding debts, mortgages, and other financial obligations. Reducing or eliminating your debt is a critical aspect of your retirement planning, as it can significantly erode your retirement income and overall financial security.

Estimate Your Retirement Income

Now is the time to evaluate your retirement income. Consider all potential income sources during retirement, including Social Security, pensions, annuities, and any part-time work you may plan to do. This income, combined with your savings, will help you understand the cash inflow that you will have when you retire.

By taking an inventory of your current financial situation, you can understand how reasonable it is to retire on two million dollars.

Want to know if you will be able to retire with $2 million? Download our free checklist to help you evaluate your financial situation. This simple tool will help you get a clear snapshot of where you stand.

Step 2: Setting Realistic Retirement Goals

Everyone envisions retirement differently, and your unique lifestyle will significantly impact whether $2 million will be enough. Once you have a clear understanding of your financial situation, the next step is to set realistic retirement goals. 

This involves defining what you want your retirement to look like and determining the lifestyle you wish to maintain. There are many financial complexities that you should be aware of as you set your retirement goals. Do you plan on traveling? Staying in a high-cost area? What are your expected healthcare costs? 

Your personal goals will shape the amount of income you’ll need and help you understand whether $2 million will be enough to support your desired lifestyle. Estimating essential expenses like housing and healthcare and discretionary spending like travel helps you determine if $2 million will be enough.

You’ll also want to consider your retirement timeline. When do you plan to retire, and how long do you expect to need your savings? The earlier you retire, the more you’ll need in your nest egg to ensure that your funds last throughout retirement. 

By setting clear and realistic goals, you will be able to understand if retiring with 2 million dollars is reasonable for you and your way of life. Understanding these goals will also provide you with a framework for making informed decisions about your savings, investments, and retirement strategy.

Step 3: Invest Wisely to Reach Your Retirement Goal

Having two million dollars sitting in a regular bank account somewhere is likely NOT going to support your retirement. Investing your 2 million dollars — or whatever your retirement target is — can help make this sum last throughout your golden years.

Building your retirement savings to cover all of your expenses requires long-term disciplined saving and strategic investing. Your investment strategy needs to work with your retirement timeline, risk tolerance, and financial goals to be effective for you. The earlier you start, the more time your investments have to grow and benefit from compound interest.

To reach your retirement goal, whether you’re looking to retire with $2 million or retire with $5 million, you’ll want to take advantage of key investment strategies. These include diversification, considering your risk tolerance, maximizing your tax-advantaged accounts, and staying the course of your retirement plan.

Most importantly, you want to start now!

By investing your assets as soon as possible, you get to benefit from compound interest. The younger you start, the greater the total return you can expect from your investments.

Want to learn how to optimize your investments for retirement? Watch our video with [ADVISOR NAME] on investing wisely for the future. You’ll discover key investing strategies from our expert team to help you reach your target and retire with confidence.

Step 4: Planning for Healthcare Costs

Healthcare is one of the largest and most unpredictable expenses in retirement. While Medicare helps cover some costs, out-of-pocket expenses such as premiums, deductibles, and long-term care can add up quickly. Not to mention, as you age, your healthcare needs are likely to increase. 

It’s important to plan for these costs to ensure that they don’t deplete your savings. Allocating part of your savings specifically for healthcare needs, or considering options like long-term care insurance, can help protect your retirement nest egg.

Estimate Healthcare Costs

Start by estimating your healthcare costs in retirement. This includes premiums for Medicare or other health insurance, out-of-pocket expenses, and potential long-term care costs. It’s important to be realistic about these costs, as they can be significant, especially in the later years of retirement.

Consider Long-Term Care Insurance

Long-term care insurance can help cover the costs of nursing home care, assisted living, or in-home care. While it can be expensive, long-term care insurance can also provide peace of mind by protecting your savings from being depleted by high healthcare costs. 

If you decide it’s best for you, it’s important to consider purchasing long-term care insurance while you’re still relatively young and healthy, as premiums increase with age and health conditions.

Create a Healthcare Savings Plan

Another way to prepare for healthcare costs is to set aside a portion of your retirement savings specifically for healthcare. You can do this through a Health Savings Account (HSA), which offers tax advantages for healthcare savings. Contributions to an HSA are tax-deductible, and withdrawals for qualified healthcare expenses are tax-free, making HSAs a valuable tool for covering healthcare costs in retirement.

Step 5: Creating a Sustainable Withdrawal Strategy

Even with $2 million saved, how you withdraw that money will determine how long it lasts. Knowing how to retire on 2 million dollars is another key part of the puzzle.

Without a strategy that is sustainable for you and catered to your needs, you will not get the most out of the money you set aside for retirement. The final step in retiring with $2 million is to develop a sustainable withdrawal strategy. 

Creating a withdrawal strategy involves determining how much you can withdraw from your savings each year to cover your expenses — both essential and discretionary — without depleting your funds too quickly. A well-thought-out withdrawal strategy is key to ensuring that your money lasts throughout retirement and supports your lifestyle.

Many withdrawal strategies are used in retirement planning, such as the 4% rule, other fixed-percentage withdraws, adjusting your withdrawal amount for market fluctuations, adding annuities to your retirement plan, and the “bucket” strategy. 

Creating a sustainable strategy is essential to ensuring that your $2 million nest egg lasts throughout retirement. Choosing the right strategy depends on your risk tolerance, life expectancy, and financial goals. Many retirees combine multiple strategies to tailor their withdrawal plans. 

It’s important to remember that living off the interest of 2 million dollars takes careful planning and close monitoring, so you must stay on top of your financial planning as you plan to wind down from full-time employment.

Is $2 Million Enough to Retire?

So, can you retire with 2 million dollars?

Ultimately, the answer to “Is 2 million enough for retirement?” depends largely on your personal situation. By assessing your finances, setting realistic goals, investing wisely, planning for healthcare costs, and creating a withdrawal strategy, you can make informed decisions that set you up for a comfortable retirement.

Planning for retirement is complex, so it’s crucial to approach it with confidence and the right guidance. Working with a trusted financial planner who is a legal fiduciary — that is, legally obligated to act in 100% your best interest — can provide you with invaluable support! They can help you assess your financial readiness for retirement, tailor a withdrawal strategy that suits your needs, and adjust your plan as circumstances change.

For a more detailed, personalized roadmap to retiring with $2 million, download our full guide, “Is $2 Million Enough to Retire?”. This guide is packed with our expert insights and practical tips to help you retire on $2 million comfortably and confidently.

Frequently Asked Questions (FAQs)

Can you live off the interest of 2 million dollars?
Can I retire with 2 million?
How will inflation affect my retirement?
Is 2 million in my 401k enough to retire?

Can you live off the interest of 2 million dollars?

Yes, it is possible to live off the interest of $2 million, but it depends on your lifestyle, expenses, and how the money is invested. 

If you were to invest in a diversified portfolio with an average return of 4%, you could generate around $80,000 annually in interest. This could provide a comfortable living for some, but it’s important to consider taxes, inflation, and market fluctuations. The amount of money needed to retire depends on your unique situation.

Can I retire with 2 million?

When it comes to specific and customized retirement advice, we recommend that you work with an advisor to analyze your financial situation, your goals, and the needs that you will have in retirement. While it may be possible for some to retire with $2 million, some may need to have more money invested to support their retirement.

At Towerpoint Wealth, we partner with Charles Schwab. They offer a Retirement Calculator tool that helps test out different scenarios to estimate your expected total retirement savings based on your annual contributions, and exploring this can be very helpful!

How will inflation affect my retirement?

The last thing anyone wants to do is fall short of their retirement plan. Whether you can retire comfortably on $2 million depends, as we’ve discussed, on a number of factors. A factor you don’t want to leave out in your retirement planning is inflation. 

Inflation can erode the purchasing power of your savings over time, meaning you’ll need more money in the future to maintain your current lifestyle. Work with your financial advisor to ensure that your retirement plan takes inflation into account.

Is 2 million in my 401k enough to retire?

$2 million in your 401(k) could be enough to retire comfortably — that is, depending on your withdrawal rate, expenses, and expected longevity. 

You need to consider healthcare costs, taxes on withdrawals, and any other sources of retirement income like Social Security. It’s important to assess your entire financial picture and consult with a financial advisor to ensure your 401(k) balance supports your retirement goals.

Bonus Step – AFTER You Have Retired with 2 Million Dollars – Pick the Right Place to Retire

Clearly, maximizing your lifestyle post-retirement requires attention to the cost of living. Stretching a dollar is always important, and retiring with 2 million dollars “buys” options, specifically, on where you choose to live.

Click the thumbnail below for the ThinkAdvisor.com slideshow that focuses on the 12 Best U.S. States for Retirement in 2024.

It is important to note that accumulating enough money is only Act One when determining whether retiring on $2 million is feasible. Figuring out how to properly, and sustainably, withdraw money (AKA decumulate) from your nest egg is Act Two, and is just as, if not more important to get right. A way-too-simplified back-of-the-envelope computation might look like this:

• $2,000,000 nest egg x 3.5% annual withdrawal rate = $70,000/year
• $70,000/year – 25% in assumed federal and state income taxes = $52,500/year net retirement income, or $4,375/month

Information is intended to be general in nature, for simplistic illustrative purposes only, and is not intended to serve as Investment advice, since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.

However, there are a myriad of additional variables and considerations that factor into this “retirement calculus.” What about pensions? Inflation? Social Security? Income from part-time work? Variability in market growth and investment returns? Appropriateness and sustainability of a 3.5% annual withdrawal rate? Increases in health care and insurance expenses as you age? Legacy and philanthropic planning and objectives? So, when can you retire?

The list of important and yet very subjective considerations goes on and on. When developing a customized retirement income plan, the nuance in working through and deciphering each consideration cannot be understated.

However, what we can say with confidence is that if you have nearly accumulated $2 million for retirement, you have an excellent head start, and have probably secured yourself many attractive options. In our opinion, wealth is not defined by a set amount of dollars, but by the freedom it affords you. And having options and choices on how to live your life is the essence of what freedom, and retirement, truly is.

Watch our YouTube “Is 2 million enough to retire”

Our President, Joseph Eschleman, CIMA® worked with the team to put together a video reviewing what everyone should think about when they think about when can I retire and five steps to help folks get there.

Check out more YouTube videos

For more information on when to take Social Security benefits and how to reduce income tax as part of your retirement plan.

• Secure Act Explained
• How do 401 (k) loans work
• Roth IRA Conversions – How to Reduce Income Tax
• Retirement account rollovers
• When should you take social security benefits?
• Maximize the money your 401k and IRA beneficiaries
  

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax efficient retirement strategy. If you would like to discuss further, we encourage you to call, Joseph Eschleman , 916-405-9150, or email jeschleman@towerpointwealth.com to open an objective dialogue.

Managing Capital Gains Distributions from Mutual Funds and ETFs

As the end of the year approaches, many investors may find themselves surprised by an unwelcome addition to their year-end taxes: year-end capital gains distributions from mutual funds and certain ETFs. 

These distributions, typically caused by fund managers selling securities within the fund throughout the calendar year, can create significant tax liabilities — even if you didn’t sell a single share of any of your investments. For investors in taxable accounts, this can feel like paying taxes on gains you didn’t directly benefit from, and can erode your net returns and decelerate your financial goals.

Understanding the impact of year-end taxes and capital gains distributions is essential for managing your tax burden and preserving as much of your portfolio’s value as possible. By being proactive and taking advantage of tax-efficient strategies, you can stay ahead of these unwanted surprises, and keep more of your hard-earned money invested for longer-term growth.

This is why a core wealth-building and wealth-protection philosophy here at Towerpoint Wealth emphasizes tax efficiency as a cornerstone of portfolio management. Tax-efficient investing isn’t just about minimizing taxes — it’s about strategically maximizing the longer-term potential of your wealth. 

In this article, we’ll explore the challenges of year-end taxes and capital gains distributions, and provide actionable strategies to help you mitigate their impact. Let’s dive into how you can turn this tax hurdle into an opportunity to boost your investment outcomes.

Key Takeaways

• Year-end capital gains distributions from mutual funds and some ETFs can create unexpected tax liabilities for investors, even if they didn’t actively sell their shares.
• These distributions are taxed as either short-term capital gains (ordinary income rates) or long-term capital gains (usually lower than ordinary income rates).
• Mutual funds are more prone to capital gain distributions than ETFs due to structural differences in how they manage redemptions and internal trading.
• To reduce the impact of these taxes, investors can:
  – Time investments carefully, avoiding purchases just before year-end distributions.
  – Prioritize tax-advantaged accounts for holding mutual funds that trade more frequently.
  – Generally, utilize ETFs in lieu of “regular” open-end mutual funds.
  – Choose tax-efficient investments.
  – Use tax-loss harvesting to offset capital gains and reduce taxable income.
• Regular portfolio reviews and proactive communication with a financial advisor can help you stay ahead of potential tax issues.

What Are Year-End Capital Gains Distributions?

Let’s start by discussing what year-end capital gains distributions are and how they affect your portfolio.

Year-end capital gains distributions are a common, but often misunderstood, part of investing in mutual funds and certain ETFs. They result from fund managers selling securities within the fund to rebalance the portfolio, manage risks, or fulfill investor redemptions. By law, the gains from these sales are passed along to shareholders as taxable distributions, even if you didn’t sell any of your shares in the fund.

For many investors, this creates a confusing and frustrating tax situation; though you may not have sold a single share, you’re still responsible for paying taxes on the fund’s realized gains. These distributions typically happen in the fourth quarter of the year, leading to an unwelcome surprise when next year’s tax season rolls around.

Mutual Funds vs. ETFs: Why Are Mutual Funds More Affected?

Mutual funds are more prone to year-end capital gains distributions than ETFs due to differences in their structure. When mutual fund investors redeem their shares, fund managers often need to sell securities within the fund to raise cash to meet the redemption. This creates taxable gains, which legally are required to be distributed proportionally to all investors in the fund.

On the other hand, ETFs use an “in-kind” redemption process that involves exchanging securities with market makers, instead of selling them directly. This process minimizes the taxable gains that are passed on to ETF shareholders, making ETFs generally more tax-efficient. 

However, it’s important to note that certain ETFs can still distribute capital gains under specific circumstances, particularly those that trade less liquid or complex securities.

Why Year-End Capital Gains Distributions Matter

Year-end distributions can have a significant impact on your financial situation, especially if you hold mutual funds in a non-retirement “taxable” account. These distributions are reported on your 1099, and are taxed as either short-term or long-term capital gains, depending on how long the fund held the securities before selling them.

For investors, this creates two main issues:

1. Unexpected Tax Bills: If you’re not anticipating a distribution, it can upend your financial plans, forcing you to pay taxes you didn’t account for.
2. Reduced Returns: Taxes on distributions eat into your investment gains, reducing your portfolio’s net overall performance.

This problem is worsened for those who invest in a mutual fund late in the year. Even if you’ve only held the fund for a few weeks, you could still be on the hook for the entire year’s distribution. That’s why understanding a fund’s distribution schedule and structure is crucial when investing.

Year-end capital gains distributions are more than just a tax nuisance — they can erode your portfolio’s overall efficiency over time. However, by knowing how they work and why they happen, you can take steps toward mitigating their impact and aligning your investments with your long-term financial goals.

How Capital Gains Distributions Impact Investors

Year-end capital gains distributions may seem like a routine part of investing, but they can have significant implications for both your portfolio’s performance and your year-end taxes and tax bill. For many investors, the effects of these distributions can feel out of their control, which is why understanding the potential impact is crucial for making informed decisions about how and where you invest.

The Tax Consequences of Capital Gains Distributions

As mentioned, when mutual funds or ETFs distribute capital gains, they are taxed as either short-term capital gains, which are taxed at your ordinary income rate, or long-term capital gains, which are taxed at lower rates depending on your income level.

Regardless of the type, these taxes can quickly add up and reduce the overall value of your investments. For example, if a mutual fund distributes $10,000 in capital gains and you’re in a 20% long-term capital gains tax bracket, you owe $2,000 in taxes, even if you didn’t sell any shares.

This tax liability is particularly burdensome for investors who hold mutual funds in taxable accounts. While tax-advantaged accounts like IRAs or 401(k)s shield you from immediate taxes, distributions in taxable accounts directly impact your finances today.

Erosion of Returns Over Time

Year-end capital gains distributions don’t just result in a one-time tax hit — they can have a lasting effect on your portfolio’s growth. Taxes paid on distributions reduce the amount of money you have available to reinvest, which limits the power of compounding over time.

Let’s consider two investors: one who consistently reinvests distributions without tax implications (in a tax-advantaged account) and another who pays taxes on distributions in a taxable account. Over decades, the investor in the tax-advantaged account will likely see significantly higher growth because their funds remain fully invested.

Unexpected Timing and Financial Strain

One of the most frustrating aspects of year-end capital gains distributions is their timing. Investors who buy into a mutual fund late in the year may still be responsible for the entire year’s gains. This means you could owe taxes on profits realized by the fund before you even invested.

If you purchase shares in a mutual fund on December 1, and the fund makes a large distribution on December 15. Even though you’ve held the fund for less than a month, you’ll owe taxes on your portion of the distribution, which could significantly impact your expected returns.

Why It Matters

The financial and emotional toll of capital gains distributions can be substantial. Unexpected tax bills and reduced returns can affect your overall financial plans, forcing you to adjust your budget or sell assets to cover the tax burden — and creating a significant amount of stress in the meantime. This is why proactive planning and strategic portfolio management are critical for minimizing these impacts.

Strategies to Manage and Prevent Capital Gains Tax Complications

While year-end capital gains distributions can create unexpected tax liabilities, there are strategies you can implement to mitigate or even prevent their impact. By taking a proactive approach to your investments, you can minimize taxes and keep more of your money working toward your financial goals.

Time Your Investments Carefully

One of the simplest ways to avoid unexpected capital gains taxes is to be mindful of when you invest in mutual funds. Before purchasing shares, especially late in the year, check the fund’s distribution schedule. Buying into a mutual fund just before it makes a distribution could result in an immediate tax bill on gains you didn’t benefit from.

To avoid this, you can review the fund’s website or contact the fund company to find out when distributions are expected. You can then delay your purchase until after the distribution if you’re investing in a taxable account. This strategy ensures you’re not inadvertently inheriting an unexpected tax liability when making new investments.

Make the Most of Tax-Advantaged Accounts

Placing mutual funds in tax-advantaged accounts like IRAs, 401(k)s, or Health Savings Accounts (HSAs) can help shield you from immediate taxes on capital gains distributions. Because these accounts defer or eliminate taxes on growth, they are an excellent choice for holding investments that are prone to taxable events.

For example, a Traditional IRA allows you to defer taxes on distributions until you withdraw the funds in retirement. A Roth IRA, on the other hand, allows your investments to grow tax-free, meaning you won’t owe taxes on distributions or withdrawals (as long as certain conditions are met). 

By prioritizing tax-advantaged accounts for funds that frequently distribute capital gains, you can reduce your overall tax liability and maximize your portfolio’s growth potential.

Choose Tax-Efficient Investments

Not all funds are created equal when it comes to tax efficiency. Certain types of funds, like index funds and some ETFs, tend to generate fewer taxable events than actively managed mutual funds.

Index funds, for example, track a market index and require less trading, which results in fewer realized capital gains. Exchange-traded funds (ETFs), on the other hand, are designed with a unique structure that minimizes taxable events, making them an ideal choice for taxable accounts.

Another option to consider is tax-managed funds. These funds are specifically designed to minimize taxable distributions by implementing strategies like loss harvesting and low-turnover trading.

Take Advantage of Tax-Loss Harvesting

Tax-loss harvesting can be an effective strategy for reducing taxable gains by using losses from underperforming investments to offset them. This works by selling investments that have declined in value to combat the capital gains from distributions or other profitable sales. 

For example, if a mutual fund distributes $5,000 in capital gains, you could sell a stock or another investment with a $5,000 loss to eliminate the taxable income. If your losses exceed your gains, you can offset up to $3,000 of ordinary income annually, with any additional losses carried forward to future tax years. 

By proactively managing your portfolio throughout the year, tax-loss harvesting can help you minimize your tax burden and support your overall financial plan.

Work With a Financial Advisor

Navigating the complexities of capital gains distributions and tax-efficient investing can be overwhelming, especially as year-end deadlines approach. A financial advisor can help by providing personalized guidance tailored to your unique financial situation, goals, and preferences.

Advisors can help you identify funds that are prone to distributions and recommend alternatives. They can also help you optimize your portfolio by placing the right assets in the right accounts and using tax-loss harvesting strategies to minimize your tax liability.

At Towerpoint Wealth, we make decisions with the understanding that minimizing taxes is a crucial part of helping our clients achieve their long-term financial goals, which is why tax efficiency is a focus for all of our investment strategies. 

By working with a financial advisor to optimize your investments for tax considerations, you can work to get the most out of your assets and preserve your nest egg for long-term growth.

Proactive Communication and Planning

Our last, but critical strategy for managing capital gains tax complications is proactive communication and planning. By regularly reviewing your portfolio and staying informed about upcoming distributions, you can make more strategic decisions about your investments and avoid costly surprises.

Closely monitoring the funds in your portfolio can help you to stay aware of your upcoming tax liabilities. Many mutual funds and ETFs provide distribution estimates in the fourth quarter, which can give you a clear picture of potential tax liabilities. 

Reviewing these estimates with your financial advisor or on your own can help you determine how they might impact your overall tax situation and act accordingly. If a fund is planning a significant distribution, you may want to take action, such as selling your shares before the distribution in a taxable account, to avoid inheriting a tax liability.

It’s also important to think ahead about your overall financial goals. Do you need liquidity in the near future? Are you planning to rebalance your portfolio or make new investments before the end of the year? By aligning these objectives with your tax strategy, you can make more efficient decisions that support your broader financial plan. Keeping open communication with your advisor and planning your objectives beforehand is key in mitigating unnecessary tax complications.

Final Thoughts

As we have discussed, year-end capital gains distributions can pose a significant challenge for investors, creating unexpected tax liabilities and reducing the portfolio’s overall returns. However, with the right strategies — such as careful timing, using tax-advantaged accounts, opting for tax-efficient investments, and implementing strategies like tax-loss harvesting — you can take control of your tax situation and minimize the impact of these distributions.

Proactive planning and regular portfolio reviews are essential to ensuring your investments remain aligned with your financial goals. At Towerpoint Wealth, we focus on tax efficiency as a cornerstone of our investment approach, helping our clients maximize their wealth and keep more of their returns working toward their future. 

If you want to learn how we can help you build a tax-efficient portfolio that supports your long-term goals, we welcome speaking with you.

By staying informed and working with experienced professionals, you can turn the stress of year-end capital gains distributions into an opportunity to strengthen your financial plan and feel confident in your future. 

Joseph Eschleman, CIMA®
President

Jonathan W. LaTurner
Partner, Wealth Advisor

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

Isabelle Orozco
Office Coordinator

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