Cheap and boring advice for retirement savers: Minimize taxes, rebalance regularly


Wealth advisor Susan Elser of Indianapolis says investing should be cheap and uninteresting. His firm has six advisers and manages $635 million in assets. She has no research staff to cut costs, and also because she thinks no one can figure out which stocks are likely to outperform. It invests its clients in low-cost value funds. She does not make wine or dine with clients. Its investment management fees are about two-thirds of most full-service advisors.

Raised in Evansville, Ind., Elser has had an interest in money since childhood. She studied economics at Indiana University, started as a business analyst for a bank, then became a stockbroker. She became a financial adviser 21 years ago after discovering she was more interested in giving personal finance advice than placing clients in hot stocks.

Elser, 58, is focused on helping clients reduce their tax bills. She thinks taxes will rise in the future due to growing federal debt and urges lower-tier clients to contribute to Roth 401(k), if offered by their employer, while working and make Roth conversions after their retirement. .

We recently spoke with Elser about taxes, Roth IRA conversions, and more. Our conversation has been edited.

Barrons: What’s wrong with having all your money in a tax-deferred account?

Susan Elser: You just have to realize that with money in a pre-tax account, you are at the mercy of ordinary tax rates in the future. We frequently have lawyers and doctors come to us with 100% of their retirement savings, say $5 million, in a pre-tax retirement account. And they absolutely haven’t built any diversification to hedge against higher tax rates in the future, to be able to pull other buckets that don’t push them into higher marginal tax brackets.

Are large tax-deferred accounts still a problem?

No. Many of our clients with very large pre-tax accounts have other large assets. This pre-tax retirement account becomes their benevolent fund. So, at 70½, you’re just starting to give $100,000 a year to your favorite charities.

You’re talking about qualified charitable distributions, right?

Yeah. Having a large pre-tax account is not in itself a negative if you are charity inclined and have other funds to live on.

With a qualified charitable distribution, you are allowed to issue a check directly from your IRA to a qualified charity or church. Once you reach age 72, this counts towards your required minimum distributions for your pre-tax accounts.

What can people do to avoid high taxes in retirement while still working?

If you are in one of the lowest three or four tax brackets, down to the 22% and 24% brackets, I would absolutely contribute to a Roth 401(k) instead of a traditional 401(k) tax deferred. We know tax rates will go up in 2026 when the 2017 tax cuts expire, and we have a $30 trillion federal debt.

What about Roth conversions? When do they make sense?

There are two times in your life when they are most beneficial. In your early 20s and 30s, when you may be in lower tax brackets.

And then retire. Let’s say you retire at age 60, and you have 10 years to start Social Security and 12 years to start required minimum distributions, where you’re going to be in a low tax bracket, and you can make small Roth conversions every year.

Once you’ve set up multiple tax brackets, how do you determine which investments go where?

I want my Roth to be almost entirely stock because that’s my tax-free bucket and I want the biggest growth there. Whatever my bond allocation, I want that in my traditional IRA. I want my slower growing assets in my high tax bracket.

You say investing shouldn’t be fun. Why?

The two negative emotions that feed into watching a 24-hour news cycle are excitement and anxiety. We try to remove these two elements from the conversation when talking to our clients about investments.

Do you advise people not to watch the news?

Personally, I have CNBC all day in my office because there’s a lot of great information you can get, but when it comes to stock picking, market timing, I think those two things are fools’ races.

Don’t like exotic investments like hedge funds?

Clients think hedge funds are something special for the wealthy. It is simply unhealthy liquidity, higher fees, opacity and tax inefficiency. If Warren Buffett says don’t invest in themwhy would you want

Why did you study economics at university?

I started as a journalism student and started taking economics classes and it seemed very interesting, very intuitive. I read “A Random Walk Down Wall Street” by Burton Malkiel, probably the most memorable investment book I have ever read.

This book opposes trying to beat the market.

Yes, the past pattern of an individual stock is not an indication of its future pattern. If you think back to the start of 2021, and if you could only buy one stock of Clorox, Peloton, Zoom or

Exxon Mobil

which would it be? No one would have said Exxon Mobil a year ago when your car was in the garage and you weren’t driving. Yet Exxon Mobil beat them.

You were a stockbroker. Why did you switch to financial planning?

It was very transactional. People were calling me and saying, “Should I buy this fund? And I always wanted to say, ‘Well, what else do you have? And what are your goals? Is it short term, short term? Is it for the purchase of a house, retirement? It was a question so much more important to me.

You charge less than many advisors. Why?

We appeal to what I call the multi-millionaire next door who is frugal, enjoys lower fees, needs a high level of service, and so we’ve cut every ounce of fat that so many of my competitors are playing really: steak dinners, golf course memberships, rented Mercedes, research staff facing the statistic that 80% of active managers fail to beat an index fund.

Specify your fees.

We write financial plans for a flat fee with no requirement that you use our investment management services, and this typically ranges from $3,500 to $8,000 depending on complexity.

And for those who want wealth management, your fees start at 0.65% instead of the usual 1%?

Right, on the first $2 million. It’s 0.35% for any amount over $5 million.

Do you think the fees will eventually go down for everyone?

I don’t know the answer to that. This surprises me. I am quite a frugal person. I don’t think I would like to pay 1%.

You are not a market timer, but you believe in opportunistic buying and selling.

Disciplined rebalancing says that whatever my goal is – let’s say it’s 70% stocks and 30% bonds – over the past two years as the market continued to rise, I would just continue to scale back a bit. earnings to avoid exceeding that 70% equity. .

Rebalancing is one of the few documented ways to increase your yields a bit. This is probably the number one thing people fail to do in managing their own portfolio. They are reluctant to buy stocks when prices are falling and more eager to buy stocks when prices are rising.

You hear people say they are waiting for the market to improve before coming back.

The worst thing you can do. We had several clients in their 401(k), which I don’t control, who sold all of their shares when Donald Trump won the presidency, and then another group of people sold all of their shares when Joe Biden won. And none of these groups benefited.

How do you structure portfolios with bonds that yield so little?

I really believe that your bond allocation is not a function of bond interest rates. It’s a matter of wallet weight and stability you want. And we have clients with 55% of their money in bonds. And we have clients with 25% of their money in bonds.

What do you think is a good balance between stocks and bonds for a retiree?

This is a very specific risk tolerance for each individual. We have a few clients who don’t hold stocks because they couldn’t tolerate the downturn.

What are they in?

Oh, just a variety of CDs and bonds, which make very little money and don’t keep up with inflation. Most importantly, it matches their risk tolerance.

One of the greatest fears of retirees is ending up in long-term care. How do you handle this?

We build long-term care planning into every financial plan we write and discuss it with every client. Probably 25% of our clients have long term care insurance, and the remaining 75% have decided to self-insure. Factors include do you have a retirement savings surplus? Are you likely to inherit the money? Do you want to leave money to your children? How much equity do you have in a primary home and possibly a vacation home?

We do not sell insurance. But I hope all agents who sell long term care insurance have the same discussions with clients.

Thank you, Susan.

Write to [email protected]

Barron’s Retirement Q&A Series


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