By Nick Fortuna
May 7, 2021
Although working with a wealth manager is invaluable, Patrick Rush, chief executive of Triad Financial Advisors, says any investor looking to participate in managing their wealth can do so if they follow five best practices.
First among them is planning. To achieve your retirement goals instead of merely wishing for them to come true, Rush says, you need a financial plan. He says when his clients list their expenses, they're often surprised at how much of their money is going to nonessentials, and they realize that they could be saving more.
Rush said a good financial plan addresses topics such as budgeting, tracking monthly income and expenses, insurance, investing, long-term care, estate planning, tax planning, and specific financial goals. Investors' plans will change over time according to their circumstances, but those who keep their financial goals in mind and continue executing their plan are well positioned for success, he says.
"When you know what your expenses and your biggest priorities are, you know what strings you can pull, what things you must have in order to live the life you want to live," Rush says. "By understanding what you're spending money on … it helps you better reflect on what is most important to you."
Here are Rush's four other best practices:
● Practice evidence-based investing: Rush points to three basic principles for enhancing long-term gains, based on historical market trends: small companies outperform large companies over time; value stocks outperform growth stocks over time; and share prices of more-profitable companies outperform share prices of less-profitable companies—the so-called profitability premium.
According to these principles, investors should avoid companies whose share prices are disconnected from their profitability. Sure, investors will miss out on major scores when highly speculative companies break through, but they'll also avoid some big losses, Rush says.
"Evidence-based investing helps prevent chasing hot equities at their peak and panic selling," he says. "If you look at results over 20- or 30-year periods, which is what you should be looking at, you see that these [principles] do pay off and will continue to pay off."
● Collect a portfolio paycheck: Rush says many retirees experience anxiety once they no longer have a paycheck coming in. A rule of thumb, he says, is that retirees will need 70% to 80% of their monthly pre-retirement income, but that amount can vary. He encourages retirees to replace their paychecks with a monthly withdrawal from their savings based on their expenses and desired level of discretionary spending.
"You start with a budget and then circle back at the end of the year and ask, 'Do you need more money, or are you saving additional cash each month?' " Rush says. "Year to year, that can change, but for most retirees … they get a lot more comfortable with that same fixed amount, and it really doesn't deviate that much."
● Plan a tax strategy: Rush said workers should contribute as much as they can to traditional 401(k) and individual retirement accounts because of the tax advantages. But with tax rates likely to go up in the future, investors should consider converting those retirement savings to Roth 401(k) or Roth IRA accounts.
"There's a good chance that tax rates are going to go higher in the future rather than lower," he says. With a Roth conversion, "you're paying tax on that money now so that it's tax-free down the road. The Roth conversion can be a very powerful tool to use."
● Account for health-care expenses: Rush points to a Fidelity Investments study estimating that a 65-year-old couple retiring in 2019 will need $285,000 to cover medical expenses through retirement. He says most elderly Americans will need long-term care at some point, so they should consider purchasing long-term-care insurance.
Employees enrolled in high-deductible health insurance plans should open health-savings accounts and let that money grow over time, instead of using it for current health-care costs, he says. In addition, choosing the right Medicare supplemental insurance coverage can make a big difference in seniors' finances, according to Rush.
"We see it all the time where people could save hundreds, if not thousands, of dollars every year just by making the proper supplement choices based on the particular drugs that they take and their health conditions," Rush says.
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