Have you ever gone to the gym and left feeling like you did not accomplish anything?
For me it goes something like this: I arrive at the gym with good intentions. I decide I am going to be active today! But as I walk through the door, I am overwhelmed with decisions. Which machines should I use? What muscle groups should I focus on? Am I getting enough cardio? After an hour of drifting around, I get back in the car and drive home no closer to my goals than when I arrived.
What I need is a personal trainer. Someone with the expertise to help me create a fitness plan, find efficient ways to execute that plan and keep me on track.
This is what a financial advisor can do for your money. Anyone can open a brokerage account and start buying stocks, just like anyone can walk into a gym. But an advisor can help you create a savings plan that maximizes tax efficiency, craft a diversified portfolio for navigating choppy markets and, when it is time to pay for the things you saved up for, establish a withdrawal strategy that protects your lifestyle.
The proof is in the numbers. According to a recent Vanguard study, individuals who work with a financial advisor achieve a 3% greater return on their investments versus individuals who do not work with a financial advisor1. Yet 37% of workers and 19% of retirees do not know whom to go to for financial and retirement planning advice, and only one in three individuals currently works with a financial2.
How exactly does an advisor do these things? I am glad you asked.
#1 – Start with savings.
As the saying goes, you get out what you put in. Building up your savings is a critical first step to financial success, but where you save matters almost as much as the amount you save.
There are numerous instruments for saving: 401ks, Roth IRAs, HSAs, 529 plans — you name it. Each account type comes with its own unique advantages, usually in the form of tax savings, as well as potential pitfalls if you do not use the funds correctly. By establishing your financial plan, an advisor can help you determine how much you need to save and where to store your savings.
Think of this as your nutrition plan. Like food, money is fuel to achieve your goals, and the source of that fuel can have a major impact on your ultimate success.
#2 – Build the investment portfolio.
Through no fault of their own, most people do not have the time, background or interest in doing the necessary research to develop — and continuously maintain — a well-diversified portfolio. Yet many try and, like my experience at the gym, are left wondering if their effort is actually paying off.
Knowledge and accountability are key. One benefit of working with an advisor is that they have the expertise to build a long-term investment allocation that is in line with your current financial situation, goals for the future, investment timeline, risk tolerance and more.
An advisor can also help you resist making emotional investment decisions, such as panic selling when the market is down. By remaining level-headed in your investment approach, you can be in a better position to take advantage of opportunities during periods of market volatility.
#3 – Optimize your tax strategy.
Details matter. When exercising, a personal trainer will teach you the correct form to maximize each rep and prevent injuries. In a similar way, a qualified financial advisor can help optimize your tax strategy to achieve the best results and avoid penalties. Here are just a few of the tools an advisor might use:
- Tax planning – A financial advisor should view all potential financial decisions through a tax-efficient lens. Tax planning incorporates a wide range of strategies, all designed to lower your tax liabilities across all aspects of your financial life.
- Tax-loss harvesting – A financial advisor will look for opportunities to harvest investment losses in order to offset gains and lower your taxable investment income.
- Tax deductions – An advisor will look for opportunities to maximize your tax deductions and credits to lower your taxable income and maximize your retirement savings
- Roth conversion – If it makes sense for your particular situation, an advisor may recommend you convert a traditional IRA to a Roth IRA. To do this, you will need to pay taxes during the year in which the conversion takes place; however, the upside is that withdrawals in retirement are tax-exempt.
#4 – Implement a strategic withdrawal strategy.
Nothing is worse than wasted effort. What is the point of exercise if you are not stronger or healthier than when you began? Having a goal is great, but the best financial plan in the world falls apart if you do not have a strategy for actually using the wealth you have worked so hard to build.
A financial advisor can help implement a withdrawal strategy that makes sense for your personal situation, with a focus on maximizing your monthly income and minimizing your tax exposure.
It is also important to consider what sources to draw from for your various needs, as well as the timing of your withdrawals. For example, if the markets are down, it may not be a great time to sell stocks to fund your lifestyle. On the other hand, when markets are up, you may want to sell some stocks and shift those assets to more conservative investments.
If you are looking for a personal trainer for your finances, we would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for retirement, please contact us.
