Published by: Patrick Walsh, Partner, Senior Advisor
Don’t let the wealth of information available overwhelm you to the point of not getting started.
There is so much information out there these days, on any topic really, but especially when it comes to personal financial planning.The internet, social media, traditional media, robo-advisors, human advisors, your buddy or neighbor with a stock tip. Everyone has an opinion and it’s easy to get overwhelmed.
Here is the best tip I can offer you:
Be diligent and consistent with your savings and investment plan. Don’t meddle, just let the plan work.
Erik’s blog post last month was about the importance of planning and accountability. I couldn’t agree more, but I’d like to dive even deeper into two specific topics that I seem to be having many conversations on with people that I meet.
Where Should I Save My Retirement Dollars? – Traditional vs. ROTH
One of the biggest benefits to using an IRA or 401(k) is the tax advantage.
A traditional IRA or 401(k) offers the benefit of a tax break right now. Your contributions today are tax-deductible, but distributions are taxed later when you pull the money back out.
A ROTH IRA or ROTH 401(k) works in the reverse. You do not get any type of tax break today, but qualified distributions down the road come out completely tax-free.
I come across way too many people getting worked up about whether to do Traditional or ROTH contributions. The answer to that depends on the future of tax rates, which of course nobody knows. (If you can predict the future, dinner is on me, because we could make a lot of money together).
ROTHs have become such a phenomena over the last 15-20 years because everyone assumes that they will be in a higher tax bracket in retirement. That makes those tax-free withdrawals in retirement so valuable. However, it’s been our experience at Oxford that most folks are either in the same, or in many cases even a LOWER, tax bracket in retirement than in their working years. If this is the case, then the tax deduction today of traditional contributions is more valuable.
Whichever option you choose, the key is that you’re getting a tax break that you wouldn’t otherwise be getting without doing the saving.
We recommend that clients save 15-20% of their total income each year to put themselves on a good track for meeting their retirement goals. The national savings rate in the United States is somewhere around 6%.
You can have the most tax efficient portfolio in the world, perfectly saving the right amounts in the right type of accounts. But if you haven’t done enough saving in total, how much does that really matter?
What’s the New Thing I Should Be Investing In?
Another issue I am coming across quite often in conversations is the idea of trying to time the market and/or find the next hot thing. I can’t stress enough how damaging that concept can be to your overall long-term planning.
J.P. Morgan published a recent study showing that the average investor’s returns over the last 20 years have been 2.6% per year. A run of the mill 60% stock / 40% bond portfolio over the same time period did 6.4% per year. That may not seem like a huge difference at first, but a nearly 4% per year difference compounded over 20 years is MONUMENTAL.
Why such a big difference? It’s not for a lack of smarts or trying. We work with lots of very smart, motivated people. Much of the answer lies in making an investment plan and having the disciplined behavior to let that plan work in good times and in bad.
Along these lines, here are some key general investing principles to always keep in mind:
- You need to build a portfolio that is goal-focused and planning-driven, which is very different from one that is market-focused and current-events-driven.
- Do not try and time the market. It will go up and it will go down. Portfolios should be built in anticipation of volatility, rather than in reaction to it.
- As long as your long-term goals or cash withdrawal needs haven’t changed, do not change the allocation of your portfolio. As a general statement, I’ve found that the more often investors change their portfolios (in response to the market fears or fads of the moment), the worse their long-term results.
Despite a media that always seems to harp on the negative (they need those eyeballs on their screens after all), we live in a wonderful age of information. Just make sure that all of the information available doesn’t stop you from taking that all important first step.
Our Partnering Process was designed to help people get over this initial hurdle. If you’re interested in learning more, feel free to give us a call or schedule an appointment online. We’d love to help you put a plan in place to make your goals a reality.