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The Full Picture

Thursday, August 13, 2020

The Full Picture

“It’s easy to meet expenses – everywhere we go, there they are.”  - Paul Moyer

We devote much of our lives to accumulating assets - homes, businesses, savings and investments, and probably a healthy list of other “stuff”.   Much is said about building and growing assets but what happens when the focus shifts from accumulating to spending?  Often this occurs in earnest around the time we retire and begin to tap into our investments to replace earnings from our jobs.  But, strategic spending decisions will take place throughout our lifetimes too.  We may want to purchase larger residences or vacation homes, fund educational expenses, expand businesses or perhaps we find ourselves faced with large medical expenses or tax bills.  Aside from establishing specific savings for items such as education or health care, which is almost always advisable, taking a strategic approach to spending can enhance your purchasing power, allowing you to do more or leave more to your heirs.

A strategic spending plan is not the same as a budget.  An important part of any planning conversation should include not just how much you intend to spend but which of your assets are best suited to cover the expense or purchase.  Should investments be the best choice for funding, it is important to make strategic choices of which securities should be sold.  There may be opportunities to offset capital gains with losses to minimize tax consequences.  Additionally, it may be beneficial to reduce large or concentrated positions in a tax-smart way or realize losses to offset gains elsewhere. 

Depending on your taxable income, capital gains tax rates range from 0% to 20% and if your income reaches certain levels, there is potential for additional taxation.  Your team of First Merchants financial experts along with your tax advisor will review your investment portfolios and other assets to determine how best to source funds for a given purpose.  This assessment contributes to sound financial decisions and planning. 

The strategic use of debt can be a consideration as well.  Given current low interest rates, perhaps pledging assets from your taxable investment portfolio for a loan rather than selling holdings would be advantageous.  This approach leaves money in the market, allowing it to grow and eliminates potential tax consequences from the sale of securities while providing liquidity for a purchase or to cover an expense.   

The type of spending is an important factor to consider when determining which assets to lever.  Ordinarily, it would not be prudent to leverage a portfolio to cover day to day expenses but funding the purchase of a specific asset this way may be a wise move.  The type of investments in the portfolio used to secure the debt must be considered as well to minimize the potential of a significant market downturn eroding the value of the securities used as collateral.  This situation could result in a need to bolster the account with additional funds to bring the collateral ratio back in line.  Generally, riskier portfolios have greater volatility and would not be the best choice for this type of situation.  There is always the option to use mortgages, pledge other collateral to secure the loan or seek unsecured financing, however these options generally result in higher interest rates.  A First Merchants Private Banker and your tax advisor should be included in the discussion to determine if the economics of this approach fit with your comfort level and ability to assume debt.  

In retirement, it is often recommended to withdraw from taxable accounts first, then tax deferred portfolios, such as IRAs, and leave tax exempt Roth IRAs for last.  Aside from Required Minimum Distributions which now begin at age 72 and depending on the amount of taxable investments you hold, this approach will generally cause a spike in taxes after your taxable accounts are depleted and you begin withdrawing from tax deferred accounts. Based on your situation, you may find that proportionate withdrawals from each retirement account type ultimately results in a lower cumulative tax bill.  

Other assets such as insurance related investments and policies may also provide a source of funding if they are no longer beneficial given your situation.  A tax-free exchange or surrendering a policy for its value may prove to be a beneficial strategy to fund more relevant needs as your financial situation changes.  Your Private Wealth Advisors team can assist with evaluating these situations and offer solutions in support of your overall financial goals.  

As you partner with First Merchants Private Wealth Advisors you can expect your team of experts to work with you and your tax advisor to not only build or preserve your assets but spend strategically as well.  

Audrey Mistor


Investment Management solutions provided by First Merchants Private Wealth Advisors may not be FDIC insured, are not deposits of First Merchants Bank, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency.  This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.