­­5 Areas to Focus On to Achieve Your Financial Goals

Recently, my colleague Adam Govani posted a blog titled “5 Headlines to Ignore,” which focused on the constant financial “noise” we all hear from well-intentioned but misguided sources.  With so many outside factors and distractions, it’s necessary to continue the conversation and touch on financial aspects that you should be focused on to achieve the financial aspirations of you and your family.

I’ll also mirror the beginning of Adam’s piece by offering another inspirational Charlie Munger quote: “The best thing a human being can do is to help another human being know more.”

As wealth advisors, we are in the business of educating, advising, and occasionally counseling, so my hope is that you’re able to shift your financial focus on matters that are important and consider a few actionable items that can have a meaningful impact on your financial wherewithal.

Tax Optimization

Taxes play a major role in most financial decisions and, quite frankly, I’m a tax nerd with a bias towards this topic.  There’s a saying  —  you shouldn’t let the tax tail wag the dog. Financial decisions should not be solely based on having to pay taxes.  Optimizing tax strategies, however nuanced it may be, can have a major impact on increasing wealth by saving dollars. At the end of the day, what you keep is as important as what you make.

Most CPAs can be backwards-looking– their focus is on collecting data that has already occurred, plugging it into sophisticated tax preparation software, and filing the data with the IRS and State tax authority.  There is also interpretation of the tax law, representing clients if they are audited, understanding the often-ambiguous tax law, etc., but for the most part, there is little in the way of implementing tax strategies after December 31^st has passed.  A forward-looking approach by planning throughout the current tax year can save you money that can be better allocated elsewhere.  Since we’re in the 1^st quarter of 2022, now is a great time to consider the following for this year:

1. Are you withholding enough from payroll? It’s one thing to pay the amount of taxes you owe, but it’s something entirely different and unnecessary to pay penalties and interest because you failed to withhold enough from payroll.  The issue of under-withholding is especially common with dual high-income earners whose employers do not consider your household income when deducting taxes and employees who receive compensation in the form of equity.  In the equity compensation example, when Restricted Stock Units (“RSUs”) vest, companies will generally only withhold federal taxes of 22%.  Since the highest federal marginal bracket is 37%, there could be a large discrepancy between taxes paid and taxes owed.  I have seen well over 6-digit surprises due to RSUs being under-taxed.

2. Charitable Giving – Giving cash is the least tax-efficient way to give to the causes you care about. Consider other vehicles such as Donor Advised Funds, Qualified Charitable Donations, giving low-basis stock directly, or other more sophisticated strategies such as a charitable trust or foundation. Learn more about ways the maximize your charitable giving by watching our on-demand webinar.

3. Take advantage of employer benefits – If possible, consider contributing the maximum to your employer retirement plan (i.e., pre-tax 401k, 403b, 457), HSA, or FSA, which will reduce your taxable income dollar for dollar. Deferred compensation plans could also be a good strategy depending on your circumstances and future solvency of your employer.

4. Roth conversions – Intentionally creating income could also be a tax-efficient strategy as long as you stay under certain marginal brackets. For example, creating income while you are in a 24% federal bracket, but no more than the next bracket of 32% is a consideration, especially if you expect income to be higher in future years.

5. Any major financial event – I kept this broad for a purpose. Almost every financial decision has tax implications, which are only magnified by the significance of the event.  Examples of major financial decisions, which are actually quite common especially here in the Bay Area, are exercising Incentive Stock Options (AMT Considerations) or Non-Qualified Options, whether to sell your home with more than $500K in gains or to rent the property, filing 83(b) forms on equity which vests over time, leaving your employer, relocating either domestically or abroad, etc.

Titling and Control of Assets

It’s not important how your accounts are titled…until it is.  And then your life, or the lives of your loved ones, can turn upside down.  If you do not have at least the basic estate plan documents in place such as a revocable trust, power of attorney, medical directives, and guardianship designations (if applicable), I strongly encourage you to do so.  Also, if you have a trust, ensure that assets are placed within it and review the document every few years.  Life changes, the number of family members fluctuate, intentions change, and estate exemption amounts change.  These conversations may initially feel uncomfortable or unnatural, but it’s important that you choose the person or people in charge of your financial wellbeing in the case of incapacitation, who facilitates the transfer of assets in case of death, how much control you prefer to have over your wealth after passing, and who would potentially care for your minor children if you’re unable to do so.  A county judge is not the best person to make these choices on your behalf.

Beneficiary designations are equally important on accounts that fall outside of probate and cannot be placed within a trust such as IRAs, 401ks, and life insurance policies.  In my career, I have found quite a few ex-spouses and estranged relatives still listed as beneficiaries.  Not only was it not your intention to leave it to the named beneficiary, but it can also cause extreme friction within your family.

Time Horizon

It’s important to focus on the various time horizons and purposes of your assets.  For example, if you are considering a home purchase this year, keep the funds earmarked for a down payment in a money market or cash alternative account that will not earn much in interest, but will not be susceptible to market volatility.  Keep your principal intact.  Conversely, longer-term money has time to withstand swings in the market in exchange for a higher return.  Of course, this isn’t to say that you should open a Coinbase account and invest your retirement funds in Bitcoin, but being a prudent investor by owning stocks of great companies at attractive prices is a great way to amass long-term wealth.

Warren Buffett once said that “Someone’s sitting in the shade today because someone planted a tree a long time ago”.  This is one of my favorite Buffett quotes and it speaks to the value of patience and long-term investing.  I can only imagine that the tree experienced a few storms along the way.

Asset Allocation

Having the right asset mix is crucial to not only building sustainable, long-term wealth, but also maintaining your sanity during volatile markets.  There is no “one size fits all” solution to asset allocation.  Much is dependent upon your risk capacity, risk tolerance, time horizon, net worth, stage of life, financial acumen, etc.  There are also other factors such as whether you are considered an accredited investor and allowed to invest in other complex investments such as private equity or exchange funds.  The overall allocation of your balance sheet is as much an art as a science.  Working with your financial advisor to review your current asset structure and discussing its appropriateness can be an extremely valuable exercise.

Financial Goals

Lastly, and in my opinion most importantly, is determining how your current investments, income, and balance sheet supports what you and your family are trying to accomplish.  Each family is unique with different goals, values, perspectives, and competing priorities.  I recommend meeting with your financial advisor to review and update your financial goals, and to develop scenarios of how financial decisions will affect your financial plan beforehand.

I also encourage developing various “what-if” scenarios.  Stress test your plan with any concerns that may be causing you anxiety.  At Summitry, we can create any number of “tests” to see how a market downturn, rising interest rates, inflation, long term care needs, rising education costs, etc. will affect your plan.  It’s an eye-opening experience for many of our clients and can help you prepare financially and mentally for any number of events.

Interested in learning more about how we approach your financial plan? Contact us today!

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