During the summer Olympics, millions of people watch the best divers in the world perform amazing acrobatic feats while falling with great speed toward a pool of water. One of the criteria for achieving a good score is based on how the diver enters the water – the least amount of splash and disturbance of the surface of the water, the better.
Now compare these divers to an average person jumping off the diving board at the local pool – even if he was doing a standard headfirst dive, it is highly likely that he will cause a big splash and will send waves of water crashing into the sides of the pool.
One thing is certain when diving into the water – you will create waves – this cannot be avoided. However, you do have some control over the size of these waves. The size of ripple or wave you create when diving into water is a good metaphor for how you manage your retirement savings. Nearly everyone can do it, but how well you do it is dependent upon many factors.
Most of the families who partner with Financial Enhancement Group are what our managing partner, Joe Clark, CFP®, describes as “Sophisticated Savers – they are financially disciplined and save a percentage of their income regularly into a savings vehicle like their 401(k) in order to achieve long term investment growth, but they would much rather keep it under their mattress if that could provide a modest return on investment.” Think of these sophisticated savers as varsity–level high school divers – they are advanced enough to stand out amongst the average person, but they still need coaching and training to get them to an elite status.
A few strategies to create ripples instead of waves:
We encourage our families to focus on building tax-diversification with their investments, because taxes can cause serious erosion to your retirement savings. Investment accounts can all be invested the same way, but they are not all taxed the same way. Most people invest most of their retirement savings into the tax-deferred option of their 401(k). While this is a good option, it may lead to unnecessarily higher taxes in retirement. Limit the waves by annually maximizing your current tax bracket with Roth conversions and increasing the percentage saved in after-tax or Roth accounts.
Pay attention to the fees and expenses associated with the positions you own in your accounts. It is very likely that your investment objectives can still be reached using more affordable options.
If you are charitably inclined, consider utilizing strategies to streamline your gifting methods. QCDs (Qualified Charitable Distributions) from IRA accounts and appreciated stock from taxable brokerage accounts are a few ways to maximize the amount of your gift while keeping more inside your accounts for a longer period of time.
Most of the work is choosing to consistently save and invest. From there, it is a matter of adjustments and fine-tuning to shrink the size of wave you create.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.