Savvy investors utilize all the tools at their disposal to make informed financial decisions. Key considerations include tax-smart planning and investing, individualized financial planning and coaching, personalized portfolio allocation, investment selection and rebalancing. By working with a professional on your financial picture, Russell Investments identified up to an additional annualized +4.83% investor portfolio outcome. As we start a new year, here are 10 strategies to consider for long-term financial success.
During distribution years
1. Defer and convert in early retirement. A coordinated retirement plan creates an opportunity to minimize lifetime tax, increase fixed cash flow, and maximize tax-free growth and income. When a portfolio is appropriately tax-structured during working years, pre-RMD (required minimum distribution) retirees can defer taking Social Security while converting pre-tax money to Roth and spending taxable money.
2. Donate wisely — Most donations do not get a tax deduction. Tax reform reduced the number of households that 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.
3. Seek generational tax minimization, even while in retirement. Lifetime tax minimization often requires electing to pay tax during lower-income years as a form of tax arbitrage 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.
Intentional and personalized investment management
4. Do not settle for a one-size-fits-all investment management approach. Investment management decisions should always result from the outcome of your plan and complement your balance sheet, personal goals, liquidity needs and tax scenario.
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. Incorporating bonds is crucial to many investors, especially those needing income from their portfolio soon.
6. Eliminate uncompensated risk from your portfolio. Diversifying a portfolio across uncorrelated asset classes reduces volatility. Professional portfolio construction decreases unnecessary risk without sacrificing return by limiting exposure to catastrophic, single-company or sector-specific failures.
During accumulation years
7. Evaluate investments and job opportunities wisely. Maximize your lifetime enterprise value when making employment and capital decisions. Look to a professional for help understanding the differences between a W2 position versus an independent contractor, benefits, and the time value of money understanding.
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.
9. Organize household finances to benefit from variable income. Using behavioral finance principles to design an automated cash flow process creates discipline for saving while empowering spending. Steady processes can be established to smooth the variability surrounding expenditures, savings and tax withholdings.
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 shortsighted and may increase the tax paid over your lifetime, limit flexibility and increase the risk of reduced purchasing power imposed by tax increases.
Bonus! Plan your legacy. 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 and the beneficiary’s lifetime.
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. For more information, visit ballastplan.com.