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If you could achieve all your financial goals with less risk, would you? I ask every new client this question, and the answer is almost always “Yes.”
Yet many investors unknowingly take on more risk than necessary because their financial strategy is inefficient. The good news is that by making your retirement plan more efficient, you can potentially earn similar or even better returns while taking on less risk.
Are you being financially efficient?
When I review a client’s situation, I often find they aren’t doing it wrong; they’re just doing it inefficiently.
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Not all investments or strategies are created equal, and I frequently see portfolios full of overlapping funds or high-cost, underperforming products that eat away at returns.
We use portfolio analytics (for example, efficient-frontier modeling) to illustrate how different asset allocations may affect the relationship between expected return and volatility.
Vanguard research shows that following asset-location principles can boost returns by 0.05% to 0.30% per year. As Warren Buffett famously put it, “You never know who’s swimming naked until the tide goes out.”
Do you have a real plan or just a portfolio?
Another common inefficiency is the lack of a comprehensive plan. Many people come to me with various investment accounts, such as 401(k)s, IRAs and brokerage accounts, but no written financial plan tying them together. This is a problem because a portfolio alone isn’t a plan.
Your plan should clarify your retirement goals, timeline and income needs and outline how your assets will support those goals. With modern planning tools, we can run detailed “what-if” scenarios:
We can model those adjustments to see if you’re still on track. People who work with a financial plan often report feeling more confident about retirement readiness and having a clearer idea of how to handle unexpected expenses.
Having a plan you can adjust as life happens is far more effective than winging it and hoping your nest egg lasts.
Mind the tax drag on your retirement
For example, the order in which you tap your 401(k), Roth IRA and taxable accounts each year can significantly affect your tax bill. Without careful planning, you could:
Academic research has shown that thoughtful tax management, such as tax-loss harvesting and asset location, can help improve overall tax efficiency over time.
Even small, consistent improvements in tax efficiency, when compounded over time, can make a meaningful difference. Reducing the tax drag on your investments is one of the easiest ways to keep more of your money working for you.
Stay involved and updated
Finally, even the best plan needs ongoing attention. Too many people take a hands-off approach and then tune out. I understand not everyone finds financial planning exciting, but staying at least somewhat involved is crucial.
As tax laws change, markets change and personal circumstances change, your plan may need adjusting. So, schedule regular reviews with your adviser to stay proactive.
I encourage you to include your family in your planning. Bringing your adult children into the process can educate the next generation and ensure everyone is informed.
At the end of the day, remember that hope is not a financial strategy. Informed action is.
Ezra Byer contributed to this article.
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