Wealth Management & Financial Planning

Wealth Management & Financial Planning

Set It And Forget It Is Great, Until It Isn’t

Many different attitudes prevail when investing for the future. Some investors choose to go it alone; others have a “Set it and Forget it” attitude, and others prefer to delegate investment decisions to a professional.

All of these strategies have merit. Which is right for you depends on your interest and your time. Looking at the performance of the U.S. stock market over the last 15 years, some investors say, “I’ll just buy a low-cost index fund and be done,” choosing the “Set it and Forget it” model.

This seems logical in this market. If you are younger than 50 and working, this is especially true. Once you are beyond 50 and begin to envision Your Life After Work, flaws in that strategy may become evident.

Once you need to turn your assets into income, your investment philosophy must change. When developing your income plan, take into consideration the time horizon before the investment is used. It’s a fact of life that when you turn 50, that time horizon is shortened and typically accompanies an investment philosophy change. What is needed at this stage of life is an investment plan that can generate income with little loss to liquidity and heavy emphasis on tax efficiency.

For example, a married couple has a standard of living of $120,000 per year after taxes. They are over 65 and taking Social Security, which provides them with $40,000 in net income. This means their combined investable assets need to provide $80,000 of net income.

The income plan for this family would likely include distributions from their pre-tax IRAs until they reach the top of the 12% married filing jointly tax bracket, currently $94,300 in 2024. An oversimplified solution would be to distribute $54,300 gross from an IRA.

After taxes are withheld from the $54,300, the couple is left with a net amount of approximately $45,000. This provides another portion to their Standard of Living, but more work remains. An additional $35,000 must be distributed from another asset. That could be taken from a taxable brokerage account or a Roth IRA. This plan is very tax efficient.

The next question is: “What is the best way to generate $54,300 from the IRA and $35,000 from the taxable brokerage account?” Active management from a team of portfolio managers is one answer. This allows you to be nimble and adjust as different sectors of the market fall in or out of favor. In addition, active management gives you the opportunity to invest in different income generating solutions. The main goals are diversification from the broader market and consistent returns.

The “Set it and Forget it” investing attitude in retirement can expose you to risk as well as missed opportunities that might help you achieve your goals for life after work. If you feel the “Set it and Forget it” strategy is no longer right for you, please consider reaching out to a financial professional in order to explore a tax efficient income plan that can work for you.

Financial Enhancement Group is an SEC Registered Investment Advisor.

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