Ask Us Before You Make a Financial Decision

The Path of Least Financial Resistance: Ask Your Advisor Before You Go There

Sometimes the path of least resistance is a good choice. For example, say you’re dining out with friends and you’ve agreed to split the check. Life’s too short and hopefully the conversation has been too engaging to start fussing over a few dollars. Go 50/50 and be done with it.

But what if the financial stakes are higher? Many people still take the path of least resistance without considering the results. When it’s the price of a decent meal, it’s no big deal. But if you’re making big financial decisions involving thousands of dollars, it’s worth finding the right answer instead of just the easy one.

This is where a financial advisor can help. Your advisor can present the possibilities in orderly fashion, so you can figure out which one makes the most sense for you and proceed accordingly.

But this is predicated on asking your advisor before you decide. Once you’ve opted for easy, it may be too late to turn back. Here are a few examples:

I’m purchasing some real estate. How should I finance it?  

The “Easy” Way: Typically, the easy way to pay for real estate is with cash, often from assets liquidated out of taxable or retirement accounts.

Easy, yes. But this not only means tying up your cash in a single piece of property instead of letting it earn market returns, it can have significant tax ramifications. Selling assets out of a taxable account can incur steep taxable capital gains. If you take the money out of a retirement account, you’ll face typically even higher ordinary income taxes – plus penalties for early withdrawal if you are not yet 59½.

Another Way: Especially when interest rates are low, we usually find you’re better off putting down a minimum amount and getting a loan to cover the rest. Applying for the loan is more work, plus you’re paying interest. But consider the math: If you obtain a 4 percent annual loan instead of using money taken from an account expected to yield 6 percent annual returns, you can expect to be ahead by about $2,000 per year for every $100,000 borrowed. These results are by no means guaranteed, but you’re positioning yourself to make the most of your assets. Your advisor should be able to provide more detailed spreadsheets to illustrate the point.

When should I take my Social Security?

The “Easy” Way: The path of least resistance is to think of your Social Security like it’s free money, to be captured as soon as you’re able.

Another Way: Instead of thinking of Social Security as “easy money,” consider it the equivalent of a longevity annuity – your critical safety net should you live a long time. That’s because, the longer you live, the better the deal becomes for you.

There are a number of exceptions to this rule of thumb (like if your life expectancy is bleak), but generally speaking, it’s usually better to hold off on drawing Social Security if you don’t immediately need the income to live on.

Typically, you’ll only receive about 75% of your full retirement age benefit if you take it at your earliest opportunity around age 62. If you begin taking it at your normal retirement which is between age 66 and 67 (if you were born after 1943), you get 100% of your benefit. For every year you wait up to age 70, you’re giving yourself another “raise” in the value of its benefit to you and your spouse, especially if one or both of you beat the actuarial odds and live an exceptionally long life.

Exactly how long should you wait? We advisors have software to crunch all your related numbers for you and your spouse on a case-by-case basis … thus the benefit of asking us before you take action. Grabbing the easy benefits as soon as you can may cost you dearly in the long run.

Should I use an accountant for my taxes?

The “Easy” Way: Especially if you’ve already been preparing your own taxes with no audits to show for it – yet – you may feel there’s no reason to spend money on an accountant. Plus finding a reputable one isn’t always so easy.

Another Way: Hiring an accountant to assist with your taxes is definitely a pound-wise “yes.” I’ve seen it time and again: Do-it-yourself tax filers fall behind on the current rules and regs, and often overlook deductions and tax-planning opportunities that would cover the costs of a fairly priced accountant many times over. And that’s before we even talk about potential audit-triggering errors. Any mistakes may well be innocent, but that won’t necessarily spare you the interest and penalties if they’re uncovered. By the way, if you don’t have an accountant in mind and you’re in our region, we should be able to recommend a few for you to consider.

Should I update my will?

The “Easy” Way: As with tax preparation, it may be tempting to turn to some of the turnkey software out there promising to help you write your own will, pronto.

Another Way: Again, what you don’t know about what you don’t know can ultimately hurt your estate and your heirs. This is another area in which it’s well worth working with a living, breathing attorney, to ensure your unique circumstances are properly reflected in the legal documents required to carry out your wishes as intended.

If it’s been more than five years since you’ve revisited your will – or you’ve not yet found your way to making one to begin with – ask your advisor to recommend an attorney to assist.

What else?

I could go on. As an advisor who has been around the block for some 21 years, I’ve seen so many paths of least resistance turn into disaster courses that could have been averted with a little advance planning.

Most recently, for example, I was asked whether a piece of rental property should be put in an LLC. (The quick answer: it depends on a number of particulars. Consult with your advisor and an allied attorney to sort it out.)  Other areas that benefit from upfront advice include: retirement plan design for small business owners; life insurance planning; financial planning; account consolidation and rebalancing; spending in retirement; managing your 401(k) assets; managing corporate benefits such as non-qualified and incentive stock options, restricted stock and company stock; investing in 529 college savings plans; and all things charitable (trusts, funds and more).

To name a few! Next time you’re thinking of taking a path of least resistance with any or all of these items, why not first beat a path to your advisor’s office? We’ll leave the coffee brewing for you. 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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