As more investors seek out and embrace personalized asset management and individualized financial advice, industry tycoons Vanguard and Russell Investments researched the value created by professional advice. Both companies measured the impact on investor returns when partnering with an advisor who provides skilled management and guidance.
Russell Investments identified up to an additional annualized +4.83%1 investor portfolio outcome, while Vanguard similarly calculated up to +3%2.
The value established by these studies is rooted in sophisticated and personalized guidance, rather than a cookie-cutter, investment management-centric approach. Investors are no longer accepting only investment management; but are demanding tax-smart planning and investing, customized and individualized financial planning, behavioral finance coaching, personalized portfolio allocation, investment selection, and rebalancing.
We have included a list of ten strategies we have successfully utilized with our clients over the last year to ensure long-term financial success for themselves and their heirs. Each strategy requires deep relational knowledge to produce an optimal outcome. We will be discussing more details of these strategies and specifics during our upcoming webinar.
FINANCIAL PLANNING DURING ACCUMULATION YEARS
#10 Accumulate Investments in Multiple Tax Categories, Not Just Pre-Tax
Many investors save predominantly in pre-tax retirement accounts. Not considering Roth tax treatment is a short-sighted decision and may increase the tax paid over your lifetime, limit flexibility, and increase the risk of reduced purchasing power imposed by tax increases.
#9 Organize Household Finances to Benefit from Variable Income
Families with variable incomes often suffer from reactive planning due to the uncertainty around the timing of their income. Using behavioral finance principles to design an automated cash flow process creates discipline for saving while empowering spending today. Steady processes can be established by creating multiple bank accounts and automating regularly scheduled transfers to smooth the variability surrounding spending, savings, and tax withholdings.
#8 Utilize Debt Correctly – Not All Debt is Created the Same
We do not favor debt on depreciating assets that facilitate overspending. However, business, real estate, and education debts can expand wealth when structured properly and with the payoff in mind. Establishing a debt reduction strategy that meets your behavioral finance personality is imperative and can improve outcomes when structured appropriately.
#7 Evaluate Investments and Job Opportunities Wisely
Opportunity costs are hard to measure and thus easy to ignore. Seek to maximize your lifetime enterprise value when making employment and capital decisions. Look to a professional for help understanding objective advice, differences between a W2 position vs. an independent contractor, comparison of benefits, and the time value of money understanding (NPV, ROI, etc.).
INTENTIONAL AND PERSONALIZED INVESTMENT MANAGEMENT
#6 Eliminate Uncompensated Risk from Your Portfolio
Diversifying a portfolio across uncorrelated asset classes reduces volatility. Professional portfolio construction decreases unnecessary/uncompensated risk without sacrificing return by limiting exposure to catastrophic, single-company, or sector-specific failures.
#5 Understand the Role of Fixed Income and Why It Fits in Your Portfolio
Owning the right mix of bonds accomplishes important goals: liquidity, income production, liability matching, and diversification. If your goal of investing is to maximize returns while maintaining some degree of liquidity, incorporating bonds is crucial to a large percentage of investors, especially those within five to ten years of needing income from their portfolio.
#4 Do Not Settle for a One-Size-Fits-All Investment Management Approach
The most successful outcomes occur when the portfolio management process is established from a financial plan that complements your balance sheet, personal goals, liquidity needs, and tax scenario. Investment management decisions should always result from the outcome of your plan, rather than as the sole foundation of the discussion.
FINANCIAL PLANNING DURING DISTRIBUTION YEARS
#3 Seek Lifetime/Generational Tax Minimization, Even While in Retirement
Lifetime tax minimization for one or multiple generations often requires electing to pay tax during lower income years as a form of tax arbitrage. This is accomplished by accelerating income that may have otherwise been deferred to a later date. You can further strengthen this strategy by allocating equity (risk) assets into tax-free Roth accounts, which reduces lifetime tax owed on portfolio growth without changing the overall risk profile of the household.
#2 Donate Wisely – Most Donations Do NOT Get a Tax Deduction
Tax reform in 2017 and 2019 reduced the number of households who itemize deductions, causing taxpayers to find creative new strategies. Utilizing retirement plans to fund charitable contributions quickly emerged with many taxpayers embracing bunching and/or Qualified Charitable Deductions (QCD) strategies.
- Bunching – combining multiple years’ contributions into a single year to surpass the standard deduction threshold in that specific year, while utilizing the full standard deduction in other years.
- Qualified Charitable Deductions (QCD) – making charitable contributions directly from a pre-tax account, thus reducing gross income, while maintaining eligibility for the full standard deduction.
#1 Defer and Convert Strategy in Early Retirement
A coordinated retirement plan that considers retirement accounts, non-retirement dollars, and Social Security creates an opportunity to minimize lifetime tax, increase fixed cash flow, and maximize tax-free growth and income. One of our favorite and most popular strategies for early retirees (before age 72) is the “Defer and Convert” strategy. When a portfolio is properly tax-structured during your working years, pre-RMD retirees are presented with an opportunity to defer taking Social Security, while converting pre-tax money to Roth and spending taxable money. This is a sophisticated strategy that can reduce generational tax liability.
Bonus! Plan Your Legacy – Not Just How Much, But Also Where it is Located
Under the new SECURE ACT of 2020, substantial benefits can be created by planning for a beneficiary’s tax scenario and properly structuring the account types both during the original owner’s lifetime and during the beneficiary’s lifetime, as well. Advanced planning can save and possibly avoid substantial tax when done correctly.
If you would like more information about any of these practices or to learn more about how to include these into your investment strategy, please call us at (859) 226-0625 or send us an e-mail at info@ballastplan.com. We’d love to connect with you.
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The introduction of the strategies discussed in this Top 10 list is not comprehensive and should only be relied upon for introductory purposes. Ballast, Inc. is a registered investment adviser with the SEC. Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC. All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.
