Putting a Dollar Sign On Financial Planning

Whether you’re a dedicated DIYer or prefer to lean on professional guidance, the truth is clear: smart financial planning can save you a lot of money over time.

Below, I’ll share some recent examples of tactical planning moves I participated in, including how much money was saved.

COVID Panic

In March 2020, you could be forgiven for thinking: “the world is ending, and I want to sell everything.”

But with proper perspective and an investment policy statement – both hallmarks of sound financial planning – many investors stayed the course.

They rode the stock market down more than 30% from peak to trough. Ouch. Nevertheless, they rebalanced along the way, selling stable assets (like bonds and money market) to buy stocks. This is not natural behavior – in fact, it’s the opposite of natural (“run from the threat” not “run toward the threat”). It’s learned behavior through experience and education.

In the end, while others made portfolio mistakes that cost them 10%, 20%, or more – permanent impairment of capital that can never be recovered – the intelligent investor has a better portfolio than if the COVID crash hadn’t occurred.

What’s the value of a 10% mistake on $1M?

Bring Me a Higher Yield

A friend-of-the-blog recently sold his successful small business for ~$10M or so. Not your everyday event, to be certain. But it’s more common than I realized.

We sat down to spitball some ideas, and my honest advice to him was:

Put together a financial plan, which details future planned inflows and outflows of money. This would include some well-deserved near-term spending! Pick an asset allocation that corresponds with that plan. Then, dollar cost averages the money into that asset allocation (e.g. 4 large tranches of investment over 12 months, or something similar)

The problem: the idea of investing millions into the stock market concerned him. I believe good investing education can help this problem, but that education doesn’t occur overnight.

As we discussed next steps, I asked him, “Where is the money right now?”

The answer? In a large US bank savings account, earning 0.05% interest per year. That’s $5000 in annual interest on a $10M deposit.

So while we continued are long-term conversation about investing in the stock market, I gave him some vital near-term advice: seek out a higher yield via a brokerage money market fund.

In the ~18 months since I gave him that advice, his average yield has been ~4.5 – 5.0%. That’s ~$475,000 in interest on a $10M deposit.

Yes – a simple tip to be sure. But sometimes financial planning is all about identifying the simple fixed in your financial ecosystem that will provide $475,000 per year instead of $5,000.

He bought my coffee that day. Don’t tell Suze Orman.

The Car Loan

One of my clients bought a new car a few months ago and came to me with a simple question:

“Should I take advantage of the 0% financing they’re offering me?”

$40,000 cash out of pocket, or a $40,000 loan with zero interest?

The math is simple:

If she takes the loan, she can keep her $40,000 in a high-yield account (such as our previously mentioned money market account) and earn ~$1500 – $2000 per year in interest. There’s no downside. There’s no loan interest accruing against her.

$2000 a year isn’t life-changing money. But it’s easy money. Small, easy percentage points can move the needle over long periods of time.

Sneak Through the Backdoor

Another client of mine came to me as follows:

Early 30’s couple High earners (total income ~$350,000 per year) Using 401(k) accounts wisely, putting lots of extra money into a Joint Taxable brokerage account

I asked them if they’d looked into saving money in an IRA…

“Yep, we looked into it, but we earn too much money.”

They were partially correct. They do earn too much for “normal” IRA contributions, but they’re the perfect candidates for backdoor Roth IRA contributions.

I think we can conservatively calculate that backdoor Roth contributions will earn this couple an extra $100,000+ over the next 30 years.

Which House?

Another client lives in the greater Washington D.C. area and, with her growing family, faces an interesting question?

Where should we buy our forever home?

Their three options – Washington D.C. itself, Maryland, or Virginia – each come with their own financial pros and cons. We helped her weigh the following:

The cost of the homes themselves (e.g. how far a dollar goes) The long-term cost of property and school taxes The state tax benefits of home ownership The impact of state income taxes on their earnings over the coming decades The impact of state capital gains taxes on their long-term investing

Of course, this family must pick a home that’s right for their lifestyle. Finances come second.

But the maximum vs. minimum we calculated puts their range of possible at a net present value over $500,000. In other words, “House A” in the most expensive locality would cost them $500,000 more than that same house in the least costly locality, as measured in today’s dollars, over the next 30 years.

Then, as always, we should ask how our lifestyle and life plan might change with an extra $500,000?

The Value of a Basis Point

Portfolio reviews are vital.

If an expert looks at your investments and says, “You can accomplish the same asset allocation as you already are but could save 20, 30, or 50 basis points if you do it this way.” …what’s the value of that recommendation?

FYI: A basis point equals 0.01%. So, 50 basis points equals 0.50%

Smart, simple investing strategies don’t need to be overly expensive. While professional financial planners do need to charge for their time and expertise, they can and should also save their clients money by keeping investing costs low.

What’s a basis point worth?

Imagine a simple scenario. An average investor might invest for 35 years, socking away $10,000 per year and achieving a long-term average return of 8.00% per year. This investor’s final portfolio would be worth $1.86M. And in this case, each extra basis point of expenses along the way decreases the final portfolio value by $4500.

11 basis points adds up to $50,000.

The lesson is simple: keep fees low where you can, and make sure you’re getting value above and beyond the basis points you are paying.

What’s a “Cash Balance Plan?”

Finanical planning is a deep subject area, with many nooks and crannies I haven’t even heard of yet. One such example occurred this year, when my colleagues recommended a “cash balance plan” to one of my clients.

He’s a successful solopreneur who last year grossed about $700,000 in income. A lot of those dollars were taxed at the highest possible levels. His effective tax rate was north of 40%.

A cash balance plan is a defined benefit retirement account (whereas a 401(k) is a defined contribution account). In other words, it is like a self-funded pension.

Cash balance plans are especially beneficial when all of the following are true:

Solo business owners, or with a very small staff. Business owners with high incomes who would benefit from putting away more tax-deferred dollars. Business owners who are higher in age (as you’ll see below, the annual contribution limits are very high for older business owners).

This client can contribute about $200,000 into his cash balance plan this year, saving ~$80,000 on his 2024 tax bill. Those savings are likely to increase every year between now and his retirement.

Of course, he will eventually have to pay taxes on those dollars when he withdraws them in retirement. But in the meantime, he benefits from tax-free growth and, more importantly, from the flexible and planned nature of retirement withdrawals; we will help him plan those withdrawals at a much lower than ~40% tax rate.

Ugly Annuities

I dove deeply on annuities in episode 86 of The Best Interest podcast.

In short, the vast majority of annuities are:

Vastly over-costed. Disappointing in terms of return on investment.

For that reason, 99% of us are best off never touching annuities in the first place. But what if you’ve already bought an annuity – what should you do then? As always, an essential part of financial planning is to “let the numbers be your guide.”

Annuities typically have “surrender fees,” which charge the owner an extra fee to exit the contract. These fees range up to 10% of the total annuity amount (e.g. $100,000 on a $1M annuity), and typically decay in size as the annuity matures. It’s common to see, for example, an 8% surrender charge in Year 1 of the annuity decay to zero surrender charge after Year 10.

Again, I have a client example. I’m working with an gentlemen who owned multiple annuities at various maturity level. We analyzed each one and showed him the potential upsides and downsides of dissolving those annuities, paying surrender fees, and then investing the proceeds into a moderate investment portfolio.

Together, we created a multi-year schedule to flip his portfolio to the light side of the force.

In the long run – say, over the next 20 years – I can confidently say he’ll save 1.5% per year on fees. And I can conservatively predict his new allocation will outperform the annuities by 3% per year (up to 5-6% per year if I’m being less conservative).

On his $750,000 portfolio over those 20 years, my conservative assumptions above lead to an extra $1.3M in compounding in his pocket.

The Power of Financial Planning

Smart financial planning is not about outperforming the stock market. Instead, it’s about identifying places in your personal financial ecosystem where you can and should be saving money, pay less taxes, earning better returns, reallocating assets, pay fewer fees, taking advantage of special accounts, etc. etc.

It’s about knowing all the rules of the game, and then playing it effectively. This article showed you just a few examples, including:

Avoiding 6- or 7-figure mistakes when the stock market panics Earning simple higher yields on large sums of money. 3% on a million bucks is $30,000 per year! Backdoor Roth contributions to earn someone an extra $100,000+ over 30 years Optimizing a home purchase to the tune of $500,000 over 30 years Keep investing fees low, or saving $4500 for every 0.01% Utilizing complex tools, like a cash balance plan, to save 6- or 7-figures in lifetime taxes Detangling ugly annuities, resulting in an extra $1M+ over 20 years

These are just a few of many examples, and none of them involved picking the winning stocks.

The real value of financial planning lies elsewhere.

Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.

-Jesse

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