Those pesky financial questions add up over time: How much to invest? When? Where? How?
Q: Where should I invest my money now?
— Thanks, Ralph
A: When are you going to need this money? You didn’t mention your plans for these investments, but I suspect that you’ll be retiring in the next decade.
Stocks are high, real estate is expensive, bonds are paying nothing, yet inflation is here.
Let’s get back to basics; after all, this is about your family’s financial security.
Estimate the income you want to withdraw annually when you retire. Choose your favorite date to start taking paychecks from your investments. The "how much and when" projections will drive the investment plan decisions for the best place for you to invest today.
Target date funds often have families converting to ‘cash’ at their retirement. This action is not in their best interest when there is likely to be a 30-year retirement filled with travel and fun. The better plan is to invest portfolios moderately based on the annual distributions and individual risk tolerance.
Aggressive portfolios are appropriate for the young while working and accumulating. As we approach a goal like retirement, portfolios need to be rebalanced to a mix that allows for distributions during down years.
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After tax accounts may be invested less aggressively knowing that ‘stuff happens’ and funds may be needed. Boring old bonds are a good placeholder for emergency funds.
Tax-deferred accounts ideally are always maximized, getting matching funds and saving taxes in real time. Taking advantage of the highest earning years to defer into retirement accounts allows tax savings at the higher marginal rates; up to 37%-plus. During withdrawals, plan to take distributions from ‘tax-deferred’ accounts (IRAs and 401Ks) up to the top of a marginal rate that makes sense. Possibly the 24%, which would result in a real tax savings of 13%.
When this becomes your plan, the ‘after-tax’ investment account needs to be invested and available for the spending above the 24% taxable income limit. Build this after-tax account with low cost, liquid, tax efficient, highly diversified, stock and bond funds in a mix that works for your spending plan and risk tolerance level.
All investments go through cycles. It is best for your portfolios to hold a diversified mix to provide a choice of options during these cycles. Don’t stop spending and living life because of market corrections. Liquidity is a must, so investments cannot have surrender fees. If CDs are selected, there may be penalties for early withdrawals. Accounts should hold fixed income funds that are liquid and don’t have surrender charges or maturity dates.
Treasury Inflation-Protected Securities (TIPs) are indexed to an inflation gauge that protects investors from a decline in purchasing power. Instead of buying individual bonds and storing them in a filing cabinet, buy inflation protected bond funds and keep them in a custodial account. Simple and liquid. Beware of their tax inefficiencies in non-retirement accounts. These funds can be sold when stocks decline in value, never skipping a beat or a paycheck.
Inflation is here; if you have any doubt, ask a Social Security benefit recipient. They were just given a 5.9% raise in their benefits for 2022 and the CPI (Consumer Price index) excludes food and energy. Another good reason to postpone taking your Social Security benefit if you’re going to live beyond age 80.
Investing today requires careful planning for the next decade; consider real savings by estimating income needs and marginal tax rates. Plan for corrections in the stock and real estate markets; we don’t know what we don’t know, so expect the unexpected.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. The above scenario is hypothetical and does not reflect and actual client experience. Individuals should speak with qualified professionals based on his or her circumstances. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. IRN-21-2999
This article originally appeared on Florida Today: Pesky financial questions add up: How much to invest? When? Where?
