At Hill Investment Group, we believe in helping our clients take the long view when it comes to their financial well-being. But what does that mean in practice? It’s about more than just numbers; it’s about finding strategies that improve your financial outcomes and give you peace of mind. 

Quantifying the Impact of Financial Advice

Several research studies have attempted to quantify the value of good financial advice. Vanguard estimates the impact at up to 3% per year, calling it “Advisor’s Alpha.” Morningstar refers to it as “Gamma,” measuring it at 1.59% per year for retirees. While the terminology may differ, the consensus is clear: thoughtful, evidence-based financial advice can significantly enhance your financial outcomes over time.

At Hill Investment Group, we believe this value goes beyond just dollars and percentages. It’s about guiding you through market fluctuations, life changes, and financial decisions with a steady hand, always focusing on the big picture.

The Behavioral Factor: Turning Plans into Action

One of the most overlooked benefits of working with a financial advisor is ensuring that the plan actually gets implemented. Most people know they should save more, spend wisely, and avoid emotional investing decisions, but turning intention into action is another matter entirely. This is where Hill Investment Group comes in—providing the support, coaching, and accountability needed to take the long view and stay the course.

The “Compared to What” Problem

Measuring the value of financial advice isn’t straightforward. It’s one thing to compare two specific strategies and determine which is better. It’s another to assess how much value a financial planner adds in the abstract, especially when we can’t know how someone would have behaved without the advice.

For example, a strategy that maximizes wealth might not be best if it leaves you feeling anxious about potential losses. What truly matters is how well a strategy aligns with your goals and risk tolerance. A financial plan that looks perfect on paper might not be ideal if it keeps you up at night. At Hill Investment Group, we focus on strategies that not only work on spreadsheets but also fit seamlessly into your life.

More Than Just Portfolio Management

Financial advice goes beyond portfolio management. It touches on various areas like tax planning, insurance, estate planning, and retirement strategies. And while some benefits, like tax savings from effective asset location, are easier to quantify, others, like peace of mind from knowing your financial house is in order, are invaluable.

The Bottom Line

At Hill Investment Group, we believe that the true value of financial planning is not just in the strategies recommended but in their execution and alignment with your personal goals. It’s not just about achieving higher returns or paying less in taxes—it’s about living a life where your finances support your well-being and aspirations. That’s the essence of taking the long view.

At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com

Hey Hill, how can I think differently about the total return of my portfolio vs. focusing on income investing alone?

Throughout our working lives, we relied on our earned income to support our day-to-day expenses. Each year, we worked, earned a salary, and used that money to cover necessities such as food, housing, entertainment, and childcare. A consistent income stream provided us with a sense of security to fulfill our needs and save for retirement. 

However, after retiring, the question arises: where will the income come from to sustain our lifestyle? While some may come from pensions or social security, these sources may not always be sufficient. As a result, investors often dip into their savings portfolio to supplement their income.

When considering how to invest their savings, investors tend to zero in on needing “income” to replace their salaries. They may have a funding gap and want to ensure their portfolio will yield a certain yearly income level through fixed-income or dividend-paying stocks. Although this approach is intuitive and may give retirees peace of mind, it does not maximize the odds of financial success. Why not?

Investment returns come from two places. Income (dividends and interest) and capital appreciation (prices going up). By focusing solely on income, you forgo the primary driver of returns: capital appreciation. 

When you go to the store and buy new clothes, you don’t care if you pay with cash from your left pocket or your right pocket. Money is money, and the source is irrelevant. The same is true of investment returns. It does not matter whether those returns come from dividends or prices going up. What matters is the total amount of money you have. By focusing on income returns or just the money in your left pocket, you are not investing in the stocks or bonds with the highest expected total return. You are not maximizing the money you have across both your pockets. At the end of the year, this will leave you with less total savings.

Capital appreciation generally drives total returns much more than income. Additionally, capital appreciation receives favorable tax treatment. Gains from price increases are taxed at a lower rate than income. Thus, an investor would prefer their return come from capital appreciation vs. income because, after taxes, they will have more money to spend. 

Therefore, rather than thinking about how much income my portfolio generates year by year, we encourage our clients to consider the total value of their investments and what that total level can sustain in terms of spending over a lifetime, understanding the ebbs and flows of the market. This approach maximizes our clients’ odds of achieving their financial goals.

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training. This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies.  Investments involve risk and, past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser before implementing any investment strategy.

At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com

Hey Hill, how can I reduce my IRA Required Minimum Distributions (RMDs) and related retirement tax liabilities? 

Contributing to traditional IRAs and 401(k)s is a great way to save for retirement. You get a current-year tax deduction, and your money grows year in and year out without being hindered by taxes. The IRS never sleeps.  You either pay them now or later.  Therefore, at some point, when you need to access these tax-deferred funds, whether that’s by choice or because you must begin taking Required Minimum Distributions (RMDs), any withdrawals you make from your IRA will be subject to ordinary income tax rates. Therefore, it’s critical to understand the different ways to plan for this most effectively. 

First, what is an RMD? The IRS requires that an individual begin taking systematic withdrawals from their pre-tax/qualified retirement accounts (e.g., 401(k), 403(b), traditional or rollover IRAs, etc.) at age 72, 73, or 75, depending on your date of birth. This annual required mandatory distribution is known as an RMD. You can calculate your projected RMD using the Schwab RMD Calculator. 

While we want our pre-tax retirement accounts to grow and be as large as possible, the taxes that will ultimately be due also grow. An investor can use three strategies to optimize this tradeoff between growth and taxes.

ROTH Conversions

One strategy is to convert assets from your traditional or rollover IRA to a Roth IRA before RMDs begin. When investors are in a low tax bracket, there are often many years between retirement and the RMD start date. Therefore, investors can save a lot in taxes by converting assets during a lower income period.

Let’s consider an example to showcase how this strategy works.

Betsy has just retired at 65 and has $500,000 in her traditional IRA. She must begin taking RMDs at age 73. Her projected RMD at 73 is about $30,000 per year. This amount might bump Betsy to a higher tax bracket in the future and may even increase her Medicare premium costs.

Since Betsy is retired, her reduced income level moves her from the 22% tax bracket to the 15% tax bracket. She decides to convert some of her traditional IRA into a Roth IRA. She withdraws $40,000 annually for the next five years from her pre-tax traditional IRA to fund her Roth IRA. Each year, she pays income tax on the $40,000 distribution but at her new, lower tax rate. This is known as a Roth Conversion. Her money has moved from one tax-advantaged account (the Traditional IRA) to another (the Roth IRA), the taxes are “pre-paid” at a lower rate, and her invested money in the Roth will continue to grow and never be taxed again. By age 70, she has successfully reduced her traditional IRA balance by $200,000, and her RMD at 73 is now projected to be only $18,000 rather than $30,000.

QCDs

But there is even more she can do. Starting at age 70.5, the IRS allows you to distribute funds from your IRA without paying taxes if the funds are gifted directly to a qualified charitable organization. Betsy currently gives $10,000 to her church annually by writing a check from her bank account. Instead, she should direct her Hill advisor to make those payments on her behalf from her IRA. This approach takes advantage of the Qualified Charitable Distribution or QCD. If Betsy’s RMD following her Roth Conversion was projected to be $18,000, by donating $10,000 from her IRA, she will only be taxed on $8,000. By planning 8 years into the future, Betsy’s Hill Advisor has reduced her RMD from $30,000 to $8,000, she will pay less in taxes, and she has a growth Roth IRA for her future needs.

Asset Location

Finally, behind the scenes, Hill manages portfolios by locating the higher-growth assets away from pre-tax accounts and locating the income-producing assets within the pre-tax accounts. This asset location strategy helps minimize future retirement taxes across your entire household. By doing this, you reduce the income taxes you pay year to year and ensure that your high-growth assets get taxed at lower capital gains rates rather than higher income rates.

Both the Roth conversion and the QCD approach, along with Hill’s asset location strategy, are not just tax savvy; they are also strategic moves that can enhance your financial security. By taking the long view on your IRA funds, you can minimize the taxes due and maximize the total dollars you have available to you as you enjoy your retirement.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk, and past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser or tax professional before implementing any investment or tax strategy.