In part one of this blog series we took a look at the University of Indianapolis’s benefits package. UIndy has a robust offering of benefits to its employees. It is a great start to having a sound financial plan. One large component of having a sound plan is the investment portion. There is a lot of moving parts that need to be evaluated in your overall financial plan. In this post, I will touch on Goals-Based Alignment, Tax-Management of Assets, as well as Asset Pools in your portfolio.
Are Your Investments Aligned With Your Goals?
At the heart of any sound financial plan is establishing what your goals are. As Zig Ziglar would say,
“If you aim at nothing, you’ll hit it every time.”
At the heart of our process at Integrity Wealth Advisors, we help you to identify what your financial goals are. Only then will we make any recommendations on strategies and investments to help you reach those goals. This should include a risk analysis that determines what amount of volatility you feel comfortable with when investing. During a consultation, I like to ask potential clients what amount of risk they believe they are taking now on a scale of 1 (being I bury cash in my backyard) to 10 (I run with scissors with my hair on fire). Most all people will respond with a 3-5. In reality, after we do some analysis we usually find that those clients are in the 8-10 range. Do you know how muc
h risk you are taking in your portfolio? Are you putting your financial goals at risk by being overly aggressive?
Tax-Management of Assets
When working with a client to craft a sound portfolio, I first look to help them diversify through a strong asset allocation. While most have heard about the importance of diversification, (“Don’t put all your eggs in one basket!”) it is important to realize that there are many different types of diversification. This includes having different pools of assets within different account types, which I will touch on later. That being said, one oft-overlooked strategy in crafting an efficient portfolio is asset location. Holding assets in different account types can ensure that you aren’t paying unnecessary taxes on interest and dividend income.
Another important aspect of managing your assets tax efficiently is harvesting losses and gains. This involves realizing gains or losses periodically to help either: A) pay capital gains now to lessen the burden later, or B) make lemonade out of lemons when taxable accounts have losses in them. Taking a look at these strategies a few times a year can make a substantial impact on your portfolio over the long-term. The markets so far in 2016 have had a rough go of things. Do you know if you have an opportunity to make lemonade out of your lemons? If you are in the 25% tax bracket and you had a $3,000 loss that you realized, you would save $750 on your taxes this year!
I mentioned previously that having different asset pools is another form of diversification. This means that it is important to have a few different account types (both taxable and tax-deferred) to maintain efficiency and flexibility over the long haul. If you have all of your assets in your 403(b), you are exposed to some tax-rate risk during your distribution years. If your retirement distributions come entirely from your 403(b) and government decides to raise federal income tax rates, your wealth that you worked so hard to build now doesn’t go as far you planned initially. Holding taxable assets as well as a Roth IRA can be a good way to retain some flexibility within your portfolio.
Many university professionals have worked at a few different institutions during their career. It isn’t uncommon for these older accounts to not be invested efficiently with your current 403(b) account. Imagine that you have four world-class composers. All of them are extremely talented. If you asked them all to handle a different aspect of a new composition, you’d have a brilliant strings piece, woodwind piece, brass piece, and percussion piece. But what happens when you play all four together? It would be a hot mess. You want to take a holistic view to make sure that all of your assets are working efficiently together. Consolidating assets can also make your financial picture less convoluted.
UIndy employees, these are some things that should be considered when you are crafting your investment portfolio. If you would like to take a deeper look into these strategies, please contact me for a FREE, no-obligation consultation. Don’t keep putting your financial planning off until later, take control of your financial future today!
Part 3 of this series will focus on Retirement Planning.
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