From Operations to Finance - The Life of a Perpetual Learner

by Jeff Learned

For those of you who know me, or for those who don't, you have probably figured out that I am a perpetual learner. When I want to understand something, I will dive all in. I view things in my life and business as just problems that need to be solved. These problems can be as simple as what am I going to have for dinner, or as complex as how am I going to scale and grow the company that I currently work for, or how am I going to diversify my investment portfolio to better suit me for my retirement goals. Regardless, there is a solution for everything. There's nothing that can't be achieved when it comes to business or life. Recently, I dove into a new pool. I've always been infatuated with money and finance, but also how things run (hence a majority of my career in operations). At this point in my career, I've come across three opportunities to work in finance. The first coming straight out of college, it was marketed poorly to me, and I was far from the mindset to do that type of work, so that was an easy pass.

Second, I was transitioning out of the military; however, I already had a job offer of $140K, yet I was still going through an interview process that had no end in sight for the financial job I was pursuing. I couldn't pass up the offer, so I again missed that new financial opportunity. The most recent was a casual interaction with a connection from LinkedIn, and I said 3rd time's a charm. God's putting this in front of me for a reason again. This time, I'm diving in and became licensed in Tennessee.

Since then, I have continued feeding myself information about stock bonds, index funds, insurances, annuities, 401(k)s, Roth IRAs, etc. I've realized that there are far more options to make a comfortable retirement than just what is presented to us as a standard solution of the 401(k). I also realized that financial education for the greater population is near zero. This information is not taught in schools; it is "tacky" to talk about money with family and friends, in public, etc. The only natural way to get around a negative aura or reputation is if you are in the financial industry. One thing I'm hoping to do with this article and a series of articles I will present over the next 4-6 weeks is enhance financial education. Again, these will come from my learnings, my understandings, and my perspectives and opinions. These are not meant to be recommendations, but I will happily discuss them further with anyone who wants to.

For the last 14 of the 16 years of my professional life, I've realized that I focused on a 401(k) plan, and only in the previous two years have I diversified beyond that. I still have a 401(k), and I'm not saying you should abandon it. You can't without a massive penalty, but there are other options, that you could diversify. My goals and how I look at this will be from a tax advantage perspective.

Let's take a look at history. There was a time when federal income tax wasn't the norm; it was only implemented temporarily to cover the cost of wars. But in 1913, the US added the 16th amendment to the constitution, making federal income tax a permanent fixture in American life. Income taxes reached their highest point during the Roosevelt years, topping 90% for America's highest earners. The income tax eventually receded to between 50 to 80% over the next 30 years. Also, during this time, Social Security and Medicare taxes were added to the mix. I bring this up to make you aware of one thing you may already know: you are not in control of your taxes.

At any point in time, the government COULD increase taxes for any number of reasons. I'm not saying this to present a doom and gloom scenario where we are on the horizon of a potential tax increase of 90% as it was back in the day. We all know what was going on during that time with wold wars and years later, there was the depression. This article does not say we are on the verge of that. But I will state the facts. Our government is $55 trillion in debt, with hundreds of trillion dollars of unfunded liabilities that are not included in that $55T number. If you're wondering what unfunded liabilities are, they are the promise of Social Security and Medicare Benefits that the government promises to pay and has withheld from our paychecks. They are referred to as unfunded liabilities because the government technically does not have the money to provide future Social Security and Medicare benefits to retirees. When Social Security was first implemented, the lifespan after the retirement age 65 was only seven years. We all know that people today live much longer than just 72 years old. You need to know that for the government to cover the debt, there is only one way they can raise money to cover that debt: TAXES. Unlike the national debt, the government cannot print money to cover the cost of Social Security and Medicare. It must come from taxes.

Based on the two previous paragraphs, the biggest takeaway is there are taxes, and you don't control them. The government does. This is common sense, but I bring this up because with the traditional 401(k) IRA plan, while you were investing tax-deferred, will be taxed upon distribution of funds. This is common sense as well. What is unpredictable is what the tax situation will look like in 20, 30, or 40 years when it comes time for you to draw upon those funds. In today's situation, most people fall within a 22 to 30% tax bracket. So, in plain English, if you drew $100,000 a year for ten years, equaling $1 million, know that you will be only paying yourself between $70,000 and $78,000 per year, equalling $700,000-$780,000. There's one other piece that we all should know that we sometimes forget: the power of inflation. Unless you invest in assets such as homes in real estate, inflation is not your friend. There is a term called real rate of return or a real interest rate. Real Interest Rate is your rate of return minus inflation, which many people don't consider. Real Rate of Return calculation In a scenario where your 401(k) has earned 14% over the lifespan, which is pretty decent, you actually only have a true rate of return of 10% (9.61%). I will use the standard inflation rate of 4% but know this may vary based on the economy's circumstances. And as we have all experienced, it has been much higher in recent years. In this scenario, your actual rate of return on your 401(k) investment is 9.61%. How I got to that is as follows:

Interest Rate of Return earn on 401(K) = 14%

Inflation = 4%

Formula = (1+Nominal Rate)/(1+Inflation Rate) – 1

= ((1.14)/(1.04)) – 1 = 9.61%

Real Rate of Return = 9.61%

Now, many investment firms may say 9.61% after inflation is ok. But there's still one aspect you must always consider when planning for your retirement or future financial goals. TAXES! With tax-deferred strategies, you will be taxed at your tax bracket at the point of distribution of funds; typically, your tax bracket will increase as you age. Using the values above, you will be taxed 22% to 30% on the value of the real rate of return of only 9.61%.

Other tax advantage strategies include Roth IRA, index funds, life insurance opportunities, etc.. At the same time, I still have a 401(k), but I have diversified away from being my sole breadwinner for my retirement. How do I look at things when it comes time to retire? My goal is to minimize the impact of taxes on my deductions when it comes time to fund myself when I retire. I will discuss different strategies and ways to go about this.

I also emphasize that this is for educational purposes. You need to do your research and talk to your advisors, and if you don't have one, I can help. But that is not the purpose of this. There are many different ways to build wealth. That is the point. You must educate yourself on the good, the bad, and the ugly. Find out what your goals are for retirement and adjust accordingly. This article is just wave tops. I will take a deeper dive into ongoing articles about different strategies that hopefully can educate you about different options.

There are other complexities that include 401(k) matching, compounding interest, costs and fees with everything that you do. But know, there are ways to build money using compounding interest that don't require to be taxed at 30% when you want your money, and you can gain access to your money whenever you want it without being restricted to the age of 59 ½ .

Thank you for reading, and I look forward to posting more articles.


***Educational Purposes Only. Written at high-level for easier context