Smart investors use 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 has identified up to an additional 4.83% on an annualized basis in investor portfolio results. As we begin the new year, here are 10 strategies to consider for long-term financial success.
During the distributive years
1. Postpone and convert to early retirement. A coordinated retirement plan creates the opportunity to minimize lifetime tax, increase fixed cash flow, and maximize tax-free growth and income. When a portfolio is properly tax-structured during the working years, pre-RMD (required minimum distribution) retirees can delay taking Social Security while they convert pre-tax money to a Roth and spend taxable money.
2. Donate Wisely — Most donations are not tax deductible. Tax reform has reduced the number of households itemizing deductions, prompting taxpayers to find creative new strategies. The use of retirement plans to fund charitable contributions has rapidly emerged, and many taxpayers have adopted bundling and/or qualified charitable deduction (CCD) strategies.
3. Seek generational tax minimization, even in retirement. Lifetime tax minimization often requires choosing to pay taxes during lower income years as a form of tax arbitrage by accelerating income that might otherwise be deferred to a later date. You can further strengthen this strategy by allocating equity (risky) assets to tax-free Roth accounts.
Deliberate and personalized investment management
4. Don’t settle for a one-size-fits-all approach to investment management. Investment management decisions should always flow 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 into your portfolio. Having the right mix of bonds achieves important goals: liquidity, income generation, matching liabilities and diversification. Incorporating bonds is key for many investors, especially those who will soon need income from their portfolio.
6. Eliminate uncompensated risk from your portfolio. Diversifying a portfolio across uncorrelated asset classes reduces volatility. Professional portfolio construction reduces unnecessary risk without sacrificing returns by limiting exposure to catastrophic failures, failures of a single company or sector.
During the years of accumulation
7. Evaluate investments and employment opportunities wisely. Maximize your lifetime enterprise value when making hiring and capital decisions. Get a professional to help you understand the differences between a V2 position vs. an independent contractor, the benefits, and understanding the time value of money.
8. Use debt correctly — not all debt is created equal. We do not favor debt on depreciating assets that facilitate overspending. However, business, real estate and education debt can increase wealth when properly structured and with profitability in mind.
9. Organize household finances to benefit from variable income. Using behavioral finance principles to design an automated cash flow process creates the discipline to save while empowering spending. Stable processes can be established to smooth out variability around expenditure, savings and tax withholding.
10. Accumulate investments in multiple tax brackets, not just pre-tax. Many investors save primarily in pre-tax retirement accounts. Not taking Roth tax treatment into account is short-sighted and can 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. Significant benefits can be created by planning the beneficiary’s tax scenario and properly structuring account types over the lifetime of the original owner and beneficiary.
Ballast Inc. is a registered investment adviser with the SEC. Registration with the SEC does not imply that an advisor has attained 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. does not practice law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. For more information, visit ballastplan.com.