The recent impact from the global pandemic has certainly shaken markets. Markets tend to have the greatest impact on portfolio assets and can cause you to question whether you are doing things right, or do you have the right team to guide your plan. Here are five areas to confirm and adjust, so you are prepared for the recovery.
Do you have the proper emphasis?
In the order of importance, the six elements of the success fundamentals are:
- How early you start investing
- How often you invest
- How much you invest
- Whether you stay invested
- How much you keep (avoiding tax erosion)
- Your rate of return
Your rate of return is not number 1. In fact, although it qualifies as important, it’s last on that list. Don’t be obsessed with chasing performance. Instead, focus on putting a plan together that considers every element.
Notice that the first five elements of the success fundamentals are behaviorally driven. It’s only the sixth element, the rate of return, that an individual doesn’t influence directly. Rate of return is dependent on business and industry conditions, the economic winds, international relations, and prevailing perceptions, to name a few.
What’s your strategy?
So many people think they need to live the life that someone else prescribes for them. They haven’t examined their own unique situation, evaluated their own values, discovered their dreams, or pursued their goals. They seem to care more about an image and the accumulation of things.
Your values may lead you to decisions that others might find questionable. I recently met with a great couple who have made some financial choices that, if you were to evaluate them only superficially, you might think unwise. But when you take it into the context of their values and what they hold dear, those decisions are in complete alignment.
Much of the American public has been convinced that the only way to achieve financial success is to beat the market. That is not true. The secret to success is determining what you want to achieve and then figuring out what it’s going to take to achieve it.
Are you prepared to play the “Back Nine?”
You might think of life as a golf course. You have the front nine holes and the back nine. Most advisors in the financial services industry focus on helping people accumulate money; they’re on the “front nine.” But a huge question is “how do you get that money out tax efficiently?” That’s critical. This points to the importance of working with a professional who understands distribution planning.
When most people retire, one of their major assets is a retirement plan—an IRA, a 401(k), or another in the alphabet soup of such plans. Their employer (and that may also be you) may have contributed a matching amount. The issue is how to withdraw that money efficiently in retirement to maintain one’s standard of living.
An important concept here is what is known among many financial professionals as a “bucket strategy.” According to one distribution strategy, you need three primary categories, or buckets, of money when you retire. You need to have 1) taxable, 2) tax-deferred, and 3) tax-free money, and you need to develop a strategy for taking the money out based on circumstances that range from personal ones to the economic and political forces that drive interest rates and taxation.
When do you want to know?
“I just can’t retire,” people sometimes tell me when they come in for a consultation. They don’t see how they could do without that paycheck or how they could sell their business.
My question back is, “So when do you want to know when you can retire financially? Because I bet you would be making some different choices if you knew it could happen way sooner than you thought possible.”
There are a lot of nuances to that decision.
Today’s typical retirees could have up to three sources of income. They’ll have Social Security; they’ll have some sort of defined benefit or defined contribution plan (401(k), 403(b), pension), whether they’re self-employed or not; and then they will have their private accumulated assets, which could be IRAs, personal savings, personal investments, equity, and property, etc.
Retirement planning also includes determining the legacy that you wish to leave. As you approach this phase of life when your money will work for you instead of you continuing to work for money, you have three basic questions to answer. We pose those questions to all our clients: Do you want to spend more, give more, or leave more? One of those three, or a combination, is what’s going to end up happening.
Maybe you know some of the answers; most people wonder where to begin. Let me reassure you that you are not alone.
Exactly who is the head coach?
This is a big one! As a 30-year veteran of the financial services industry, and a coach to advisors and their practices, the one thing I can tell you is that most advisors are winging it! That doesn’t mean they aren’t talented, or trustworthy, or can’t deliver results. It just means that they do not have a repeatable, predictable, unflappable process that works in all market conditions. Here is something else: the term “financial advisor” is too generic. Most advisors are actually wealth managers – they look after your money. Contrast that to a comprehensive financial planner who is also a fiduciary, legally bound to act in your best interest – a big difference.
Why does it matter? If you were the owner of a professional sports franchise, you could hire a head coach to coordinate all of the specialty team coaches and players on the field. You could simply tell them what you want to achieve—a better record than last year, going to the divisional playoffs, or winning the big show. Their job is to worry about the day-to-day and to make it happen. Your head coach’s qualifications would likely be more significant than they played football in high school.
Does your ensemble team have the expertise and resources to be the head coach of your financial plan? A financial planner requires the leadership abilities to coordinate all of those players: risk management, wealth management, planning, tax, and legal. He or she must know enough about each of those particular disciplines to recognize when it is time to call in a specialist.