by Jeremy D. Shipp CFP®, CLU®, RICP®
I saw a story over the summer that highlighted the importance of balance in nature. And when I thought about how important balance is in retirement, I knew I had to share the story. Let’s start with a question: What do you think about wolves? Do you think they serve a purpose, or could we get along just fine without these vicious predators?
Well, if you wanted to change the course of the rivers in one of the largest national parks in the country, would you believe that one way to do it is to increase the wolf population in the park?
Trophic Cascades: One of the Most Exciting Scientific Finding of the Past Half Century
A trophic cascade is an ecological process that starts at the top of the food chain, tumbling all the way down to the bottom, with the effect on the surrounding ecosystem being quite astounding. During 1995 and 1996, 31 wolves were re-introduced to Yellowstone National Park after being absent from the park for over 70 years.
Since wolves are at the top of the natural food chain, their absence created an imbalance in nature. Absent natural predators, the deer population in Yellowstone exploded to unmanageable levels, despite human attempts to control their numbers. As a result, the park’s natural vegetation was gradually eaten away to next to nothing – there were too many deer and not enough food. The re-introduction of wolves obviously had an immediate impact, as they killed some of the deer.
However, the more dramatic effect was seen in the migration patterns of the deer. Now that they were being hunted, the deer tried to steer clear of easy hunting grounds, particularly the valleys and gorges in Yellowstone. As a result, the vegetation in those areas drastically increased, so much so that the trees actually quintupled in size in just 6 years. Birds returned to these trees, and beavers moved into the ecosystem. The beavers built dams, which subsequently created habitats for fish, muskrat, otters, ducks, amphibians and reptiles.
The wolves also killed coyotes, so the numbers of rabbits and mice began to rise. This meant more hawks, weasels, foxes and badgers. Ravens and bald eagles moved in to feed on the carcasses left by the wolves. Bears fed on the leftovers too, and there were more berries for them to eat due to the growing vegetation, thus allowing the bear population to grow. The bears also further reinforced the impact of the wolves by killing some of the calves of the deer.
So over time, as the vegetation grew and the ecosystem came back into balance, soil erosion decreased and the banks of the rivers became more stable. This created new channels through which the waters could flow until the general course of the rivers in Yellowstone actually changed! What began as an experiment to control the deer population turned into a profound discovery of the effects on an entire ecosystem when it is allowed to operate with proper balance.
Applying Balance to the Financial Ecosystem
Without balance, by removing one single piece of the puzzle, the result was desolation. With balance restored, we once again have one of the most robust and beautiful habitats in North America. As in nature, balance is critical when it comes to finances and retirement. And I’m not talking simply about the balance between stocks and bonds.
Based on our experience, a more important determination of balance centers on liquid assets (money in a savings account) versus non-liquid assets (home equity). Financial assets are only useful to you if you have access to them and can have control over the money. Balance also becomes even more important when we consider the single biggest risk to current and soon-to-be retirees: taxes. This refers to taxable money (401k, IRA) versus non-taxable money (ROTH, cash value life insurance).
If all of your retirement money is taxable, and tax rates go up, you will not only have to pay more taxes, you will also have less income on which to live. Sure, you received a tax deduction when you put money into that 401k or IRA, but if you pay more taxes to take money out of the account than the tax deduction that you initially received, that is a losing financial transaction. So the questions become:
- Is all of your money in a taxable account?
- Where will tax rates go over the next 10-20 years?
Everyone has their own opinion, but most would agree that tax rates have only one direction at this point – up. Consider what David Walker, former comptroller general of the United States and head of the Government Accountability Office, had to say in 2009: “Based on the current fiscal path, future taxes will have to double or our country will go bankrupt.” And that was back in 2009 when our national debt was $11 trillion instead of the $19.5 trillion it is today.
Proper balance is important in nature, life, and especially your finances. As you can see with the Yellowstone story, you can restore balance in nature, and you can certainly restore it in your financial world. If your overall financial picture is out of balance, it is never too early, or too late, to address it.
Just like in Yellowstone, you can create a trophic cascade in your financial ecosystem with minor tweaks to your plan. Once you make a change at the top of your financial food chain (the way you manage your assets), you increase the potential to experience the trickle-down benefits of financial balance – less stress, deeper personal relationships, more time to spend with loved ones, better health, etc. The possibilities are truly limitless. There is no single approach or plan that is right for everyone, but a holistic approach helps provide balance in one’s financial ecosystem.