Building Wealth with Purpose

Welcome to this week's edition of The Weekly Trail Report, where we share,

1 Story, where real stories of architects and engineers meet tailored financial strategies,

1 Actionable Tip, to provide actionable insights and guide you towards financial success,

1 Financial Term, to demystify key concepts and empower your decisions.

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1. Story: Greg Decides to Build Wealth with Purpose

Greg, a senior engineering manager, had been diligently contributing to his 401k for years. In fact, he had accumulated multiple 401k’s and even an IRA over his career.?

He had gotten to the point where he had amassed a substantial amount of savings and was starting to think about retiring early.

Greg had never wanted to work full time until 65, but hadn’t put too much thought into it up until this point. He had always talked about wanting to retire between 50-55 and now that he just turned 42 that time was quickly approaching.

It was at this point that he found me and reached out.

Greg asked, “I have all these investments, but I don’t really know what they are doing. I know I’ve done a good job of saving, but are these the right investments for me? What do I need to do to actually retire in 10 years?”

After reviewing his existing account statements it became clear that there wasn’t a coherent strategy between Greg’s investments.

One old 401k was in a target date fund, another old 401k was entirely in an S&P 500 fund, his Roth IRA had a handful of different single stock selections, and his current 401k was split between the US stock market, European stock market, and bonds. He also had a brokerage account with a variety of different individual stocks and some longer term bonds.

“What’s your investment strategy?”, I asked him.

“I don’t have one”, he answered.

So we set out to build Greg a better portfolio.

1. First, we conducted a risk assessment.

Greg had a strong emergency fund, lived below his means, minimal debt, and was well insured. With ~10 years or so until he was thinking about stepping back from work, along with being flexible on that timeline, we agreed that he could be aggressive with his investments.

1. Second, we consolidated his accounts.

We combined old 401k’s and IRAs so he had fewer accounts to worry about.

1. Third, we reviewed his asset allocation.

Greg was sitting at 78% stocks, 20% bonds, and 2% cash. This didn’t line up with his aggressive stance on an early retirement.

1. Fourth, we looked at his level of diversification.

Greg was heavily focused on the US stock market. We wanted to move out of bonds but wanted to maintain a well diversified portfolio. For this we looked to other assets like precious metals, commodities, and digital assets to provide uncorrelated returns.

1. Fifth, we looked at the historical performance of his accounts.

Greg’s performance so far had been very similar to the S&P 500. Which for the last handful of years had been pretty good. The challenge though was Greg wanted to be ready to step back from work on a moment's notice. This meant he didn’t want to experience the potential large 30%+ downturns that can come from the S&P. Greg agreed that a more active investment strategy could help to avoid some of the severe declines in the market.

1. Sixth, we analyzed the fees in his accounts.

For the most part, Greg wasn’t paying too much in fees, but he did have a couple mutual funds from an old 401k charged higher rates. By moving to lower cost funds we were able to keep more money in his accounts.

1. Lastly, we looked for ways to increase tax efficiency.

Greg had his bonds in his brokerage account, so he was paying taxes on the interest. By shuffling his investments around, we made sure that the high yielding investments were in tax advantaged accounts like his 401k and IRA.

When it was all done, Greg had a brand new portfolio that was:

• Consolidated
• Diversified
• Tax optimized
• More aligned with his goals

Once we were finished, Greg exclaimed, “I didn’t realize there was so much that went into setting up a portfolio! I just thought it was picking some stocks.”

2. Actionable Tip: Optimize Your Portfolio

Investing is a lot more than just picking a couple stocks and hoping for the best. Your investments should be approached from a holistic standpoint that takes into account all factors of your financial life:

• Goals
• Risks
• Time
• Cash Flow
• Taxes

Small changes compounded over time lead to big differences. Don’t leave your portfolio for later when it “matters more”. Make sure your investments are aligned with your goals, time horizon, and risk level.

Doing so now will make sure you can make work optional when you want to. Not when the market says it's okay.

3. Financial Term: Tax Efficiency

Tax efficiency refers to the ability to minimize the impact of taxes on investment returns and maximize after-tax income.?

Some key considerations:

• Use tax-advantaged accounts (401ks, IRAs, etc.)
• Optimize asset locations (ETFs in brokerage account, high yield bonds in tax advantaged accounts)
• Harvest your losses (selling investments at a loss to offset gains)
• Municipal bonds offer tax-free* interest

* Tax free federally and sometimes at the state and local level depending.

Happy Trails,

Ryan

Disclaimer: We employ fictional characters to illustrate financial concepts faced by individuals in the architecture and engineering industry. Any resemblance to real persons, living or dead, is coincidental. While the stories are inspired by our experiences, the specific details, circumstances, and outcomes mentioned are entirely fictional and created for educational purposes only. Real client information is strictly confidential and never disclosed without explicit consent. Our aim is to provide relatable examples for educational purposes, respecting the privacy and confidentiality of our clients.