How to Build Wealth Efficiently
Most people lose 20+% of their wealth to taxes, fees, and poor planning - without realizing it.
Identifying the Leak
Have you ever had a leaky faucet? That slow little drip that annoys you more than it concerns you. It doesn’t concern you until you get the water bill the next month and it surprisingly had an impact.
Every time it rains, you pull out your trusty bucket to stop the drip in the office. The building is old, needs updating, and you’re just managing it each time.
That’s what an inefficient wealth and financial plan is. It presents itself as a small problem, a slight annoyance, but doesn’t feel threatening. Or you’ve had this plan for a while and you’re satisfied. Your financial advisor or CPA is a trusted friend, and you don’t want to say anything.
The problem with inefficient wealth and financial plans is that they aren’t $50 water bill mistakes. They present themselves having zero consequence for what can sometimes be decades. But when the problem and cost associated with that leak presents itself, it’s a six-figure leak.
Today I’m going to be educating you on three major leaks that are overlooked in wealth and financial plans. By fixing them, you will instantly have a more efficient wealth and financial plan.
The great news? They have nothing to do with investment selection or returns which may or may not be out of your control. They are simple, proactive strategies you can implement today.
Grab your mug, pull up a chair, and let’s dive in.
The Business Partner You Didn’t Choose - But Still Pay
Imagine you own a business. You file the paperwork, you open accounts, you’re responsible for bringing in the money to keep the lights on and grow.
You receive great news in the mail; you’ve anonymously been awarded a grant because they found out you aren’t paying yourself out of the business and are working hard. With this grant you’re allowed to bypass taxation as your business grows, even better they will let you deduct every dollar you put back into your business.
Fast forward in time and you’ve decided it’s time to reap the benefits of your hard work. You’re going to start paying yourself some money out of your business, after all you’ve worked hard for this. It feels so good to cash your first check, you decide to cook yourself a nice meal and open that bottle of wine you’ve been waiting to try.
Just as you uncork the bottle, there’s a knock on the front door. There’s a man with a three-piece suit and a Bentley out front. He says “I know you don’t know me…. but I’m your Uncle Sam.” To which you respond, “I know my family is messed up but Jerry Springer passed away three years ago, this can’t be possible.”
He sits down at the table and tells you that he was watching you from afar, admiring your hard work. Several years back, he was the sponsor of your grant. He asks if you read the back of your acceptance letter. You grimly respond that you did not know there was a second page.
Your Uncle Sam informs you that the fine print of the grant was that whenever you did finally pay yourself, he was going to collect 25% of what you eventually pay yourself.
The immediate response you have is two things. First, you say had you known you may have done things different or not taken the full grant. Second, you reply by telling him you’re doing fine right now so you’ll put the cork back in the wine and celebrate another day.
Uncle Sam tells you about an unfortunate detail in the fine print. There’s a stipulation that if you haven’t taken money out of your account by a certain age that you will be forced to take a percentage so he can collect his share. “But Uncle Sam, there has to be another way!” you insist.
He grabs your hand and tells you about his situation. “Do you like my outfit and the car out front?” You reply that you do and that it presents itself very nicely.
“I did not have the money for this outfit, and I definitely did not have the money for the Bentley. I took out a loan before I came over here to buy these things. As I was pulling off the lot in my brand-new car, I saw a homeless man. I felt bad for him, so I promised him that I’d pay for his healthcare and meals for the rest of his life. I did all of this because I remembered the details of our agreement. I knew that you were doing well enough to cover it for us all.”
That, ladies and gentlemen is what it’s like to contribute to a pre-tax retirement account (401(k), IRA, etc.) blindly for 30+ years. It feels great in the moment, there’s zero friction, and it’s easy to get started. But left uncheck, you now have a silent business partner in the federal government that you never realized you had.
This “business” relationship is designed to take six-figures of your retirement dollars systematically over a 20–40-year retirement. Those lost dollars then cannot be reinvested which costs you compound interest. Before you know it, you’ve lost $400,000+ in lifetime wealth and portfolio value.
Taxes are the largest hidden leak in retirement and business plans today. A dollar lost in taxes is a dollar gone forever. Each week, I will be discussing extensive solutions that can be used in various situations to reduce or eliminate taxes from your financial plan.
The Advisor You Chose - But Never Questioned
He’s a sharp guy, very well connected in your community. He’s getting up there in age, but his reputation precedes itself and you’ve known him for 20 years.
When you sit down with him, the returns on your investments are fantastic. He’s a great asset manager with a keen eye for where the market is headed. Your advisor informs you that you’re completely on track for retirement. Visually there’s no evidence of that, but you trust his professional judgement.
You’re on a work trip and you stumble upon a YouTube video discussing preparing for retirement. They bring up the statistic that tax rates have to double by 2030 to prevent the social security trust fund from going insolvent. This content creator even references your state’s probate expenses if someone dies with significant assets outside of a trust. The last one really catches you off guard, the average retiree is paying over 1.5% in fees to their financial advisor and none of these risks are addressed.
When you get home, you rush to find your statements. On the bottom of page 3, you see your fate. You are paying $7,500 a year in fees on that IRA you rolled over to him. Even worse, the YouTube video mentioned that there’s always another 0.15-25% in fees you can’t see. $8,250 for an advisor that you like but see once a year.
You’re like most people and don’t mind paying for quality advice. After all you know what they say, you get what you pay for. You call his phone and bring up that you’d like to discuss doing some tax planning, his help establishing a will and a trust, and that you’d love for him to review your health insurance.
The advisor responds, “I’m sorry but we don’t do those types of planning here, it’s not something that we specialize in.”
This is a misunderstood leak inside of a financial plan. Radio personalities and social media influencers will tell you that “fees are bad!” That statement, however, lacks context.
Many people would agree that indeed, you get what you pay for. The absence of advice based on a fiduciary, fee basis leaves room for the other end of the spectrum which is people selling you products exclusively for commission.
Hear me out that fees are not bad, in the correct context. Fees that add value are a sound investment to your financial plan and mental well-being.
Paying fees for incomplete planning without a vision for where you are headed relative to your goals is a leak that will have significant consequences.
Pretend this advisor grows your portfolio by $250,000 before age 75 when the government forces you to pull your money, you’d be happy.
But from 75 to 95, you’re locked into taxes you didn’t know were possible. Because of your elevated income you now have higher health insurance premiums. At 95, you pass away and your family pays $50,000 in probate expenses on loose ends that weren’t planned out.
When it’s all said and done; you paid $600,000 in additional taxes that could have been avoided, $75,000 in increased health insurance costs, and $50,000 in probate expenses.
A $725,000 leak you wish you would have planned for. You also paid $175,000 for his incomplete advice and management over the years. $900,000 later…poof.
The Plan You Never Built
You close the rental car door. You’re finally taking your bucket list trip; you flew out to Boston and you’re going to drive from coast to coast.
You’ve never been an edgy person, but you have decided that you’re going to attempt to make the journey without a map. You’re relying on pure instincts and intuition, after all you’ve been wanting to test yourself.
Being honest with yourself though, you know you’re directionally challenged. Day one has been long and honestly there hasn’t been much to see. But you’re ignoring the time and enjoying the journey.
After 7 hours and a few stops, you see water on the horizon. Something can’t be right; there shouldn’t be water for days along your journey. The highway sign says Buffalo 15 miles. You’ve gone in the wrong direction.
That is retirement and building wealth without a plan. The common person who has worked hard, grown a business, or raised a family doesn’t have the knowledge or expertise to navigate the road ahead.
By not having a plan, you are directly susceptible to the following financial planning risks:
Longevity Risk
Market Risk
Inflation Risk
Sequence of Returns Risk
Health Care Risk
Interest Rate Risk
Policy Risk
Withdrawal Risk
Even if you weren’t directly exposed to these risks, you would still be vulnerable to feeling like the person driving across the country without a map. You will make countless wrong turns, take a longer and more inefficient path, and not be aware of danger up ahead.
Building and distributing wealth without a plan is dangerous, costly, and extremely inefficient.
As we continue this discussion each week in Coffee & Compounding, I will be discussing the eight major risks highlighted above with tailored solutions to effectively reduce or eliminate them before they occur.
The Framework That Aligns All Three
Having an efficient wealth plan starts by having a clear framework for achieving your goals. I’m going to shout out my sales coach Chuck Hollander with Red Flag Advantage for this; he gets all the credit here.
Chuck helped me develop this framework for my business. After seeing results in my business, it was easy to transfer it to our planning work which has worked beautifully.
The framework is this: Identify who is important in your life, what are you looking to achieve, what are the roadblocks getting in the way of your goals, and what is the cost and consequence of not addressing those roadblocks as it relates to achieving your goals.
Going back to our “leaks,” we will start with having a plan as it relates to our framework.
To have a plan, you have to be crystal clear on your GOALS. Ask yourself, what am I looking to achieve?
As it relates to hiring an advisor, paying for advice, etc. you are working with an amateur if they are not helping you move through this decision-making process effectively.
Most advisors and individuals confuse goals with roadblocks. Let me say it again differently, you may not know how to describe your goals when you first think about it. Initially you’ll throw out roadblocks that present themselves as solutions as your goal.
Let me give you an example. You sit down with your financial advisor, and they ask what you’d like to accomplish.
You respond by saying “The market is pretty uncertain right now, I’d like to take less risk in my investment portfolio.” Naturally, you feel like this is a good thing to change.
The amateur advisor pulls out his paperwork to move your account over and begin charging you fees, LEAK.
The professional advisor just asks one more question. “Can you tell me why you’d like to take less risk outside of the market being uncertain?”
Comfortably you respond by saying “I’m afraid that if the market crashes, I won’t have enough money to leave to my children and that’s very important to me.”
That is a goal. The professional advisor then points to a multitude of other risks in your planning that would also be a roadblock to your goal.
This allows them to quantify and help you see that if you don’t address those roadblocks, how much money it will cost you relative to your goal overtime. Just like that leaky faucet we discussed earlier.
Once you can see what you’re up against, you now can make an informed decision on which are the best solutions to ultimately solve your problem(s).
Focus On the Two Areas That Fix Your Leaks
The secret to an efficient retirement plan isn’t crazy rates of return, super sophisticated strategies, or even cutting every single fee you could ever pay to a professional.
After all, if you pay the same advisor that we picked on earlier $5,000 (40% less) but see great returns, tax planning that saves you $600,000 in retirement taxes, and estate planning that saves your family $100,000 in probate costs; it’s an exponential investment.
The two solutions to a highly efficient retirement plan are as follows.
Being clear on what you’re looking to achieve, your goals. Do not make the fatal mistake of confusing roadblocks for goals.
Hiring a professional that can help you explore what those goals are at a deeper level, help you identify roadblocks (that you may or may not see) getting in the way, and educate you on the best solutions for your situation to solve them.
If you will get those two areas right, every other problem will be presented and solved before it builds up into a thirty-year leak.
What I’ve Been Drinking Lately
The last few weeks I’ve been drinking Airship’s Buffalo Blend. It’s sweet and balanced with hints of caramel, vanilla, and brown sugar.
Their Buffalo Blend is a true medium roast. It’s more sweet than bitter. It has a fantastic taste and smells delicious when I fire my Moccamaster up in the office.
You can find it on the shelves at Walmart and Akins here locally in Northwest Arkansas or you can visit airshipcoffee.com. No, I’m not sponsored. Just a shameless plug.
I’ll see you back here in a few days, cheers.