The Juice Is Worth The Squeeze
Vince Lombardi was arguably one of the greatest football coaches of all time. One thing that made Lombardi successful was his relentless focus on the details. Vince was quoted as saying “Perfection is not attainable, but if we chase perfection, we can catch excellence.”
Like football, attention to the smallest details in financial planning can make a big difference over time. Unfortunately, many of these small details get missed. I believe these small details get missed because people believe the effort to implement the small changes will only result in small benefits. Fortunately, this mindset can be changed when you help people quantify the magnitude of small changes producing big results over extended time frames.
My hope with writing this newsletter is that I inspire you to make more small changes because frequently the juice is worth the squeeze. To illustrate this point, I am going to share two examples we commonly see people miss out on when they initially come to us from another firm. The two examples I will illustrate include tax cost ratio and safe money interest maximization.
Tax Cost Ratio
Tax cost ratio is the amount of an investor’s return that is reduced annually due to the taxes created by a specific investment. For example, let’s assume an investor owns a stock mutual fund, outside of a retirement account, that averages 8% per year with a tax cost ratio of 1% per year. The investor essentially gets to keep 7% per year after deducting the 1% tax cost from the 8% return. This percentage can vary wildly depending on the investment. Tax efficient stock mutual funds might have a tax cost ratio close to .3% on an annual basis. Where tax inefficient funds might have a tax cost ratio of 3% or more. This may seem trivial, but it makes a significant difference when we put this into context of a longer-term retirement time horizon.
Let’s assume we have two investors who both have $200,000 investment accounts that have an average 8% rate of return. The first investor places their money into a group of funds that averages a modest 1.5% tax cost ratio. The second investor chooses a series of tax efficient funds that have an average tax cost ratio of just .3%. Over a 30-year retirement, the first investor’s $200,000 would have grown to $1,322,873. Over the same 30-year retirement the second investor’s investment would have grown to $1,851,403. This small change led to a difference of over $500,000 over the course of a 30-year retirement.
Safe Money Interest Maximization
A second example where a small detail makes a big difference occurs with how investors manage their safe money. There are many different types of “safe investment options”. Generally, FDIC insured checking and basic savings accounts pay the lowest yield but provide the greatest liquidity. Other options including FDIC insured CDs, Treasury Bills, I-bonds, and FDIC insured Brokerage CDs typically provide higher yields with less liquidity. Additionally, the yield on these investments can vary significantly over time. For example, there was an extended period recently where Treasury Bills were paying close to 5% while most local CDs were paying closer to 2%. Although the safe money yields may seem trivial when viewing at a glance, over time this also can make a significant difference.
For example, let’s say we have two investors who keep $100,000 in their various bank accounts. The first investor is more passive with where their safe money is located and therefore averages 2% over a 30-year retirement. The second investor actively transitions money between the highest paying safe money alternatives and as a result, can earn an additional 1.5% per year. The difference this makes during a retirement time horizon with very little effort expended equates to an additional $99,543.
These are just two common examples where we see people leave money on the table. There are many other areas where small changes can make big differences. Hopefully, I have encouraged you to pay attention to those small details in the future.
Enjoy your Spring!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Hypothetical examples are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
