All Tactics, No Strategy: The Achilles Heel of Many Successful DIY Investors
Many successful DIY investors struggle to escape the DIY hamster wheel mindset.
Graphic Credit: DALL-E 3 / OpenAI.
Successful DIY investors are often very reluctant to hire financial advisors as they approach retirement. But they also do not feel completely confident in their financial plans. The confusion they’re feeling is because financial planning for pre-retirees and retirees isn’t about simply implementing best-practice investing and saving tactics, but about creating a long-term, integrated financial life strategy that balances achieving life goals, maintaining retirement security, and minimizing taxes. And unlike investing, long-term financial planning is hard, and there is no “one right answer” because everyone’s situation is very different.
“Tactics without strategy is the noise before defeat.” - Sun Tzu
Over the past few weeks, I have met with several prospective clients who have been successful savers and investors. They share the following attributes:
They have a long history of saving large amounts of money in retirement accounts.
They have a good track record of investing (although quite often the investing has been too concentrated in US stocks).
In some cases, they have implemented intermediate-level tax planning tactics like Backdoor Roth conversions.
They are generally well positioned to retire at a reasonable age or even in their mid-to-late 50s, and they know that they are well-positioned to retire.
In other words, these investors have been reading all the right financial education resources and have been successfully using best practices to build their wealth.
Sounds good, right? Nothing to complain about, right?
And yet…despite all this “success,” they are reaching out do an initial consultation with a financial advisor.
Why?
The common theme from all these successful do-it-yourself investing clients is that they never stopped to ask what they wanted to do with the wealth that they are creating.
In several cases, it turns out these clients actually did NOT want to retire from their jobs, even though their wealth was sufficient to do so. They enjoyed their professions. But continuing to work meant that their pile of wealth would continue to grow ever larger, creating long-term tax planning challenges.
In other cases, people did want to retire, but they didn’t know exactly what they wanted to do in retirement. And because they didn’t know what to do, it was hard to know if they actually had enough savings. In other words, despite their wealth, they didn’t fee confident in their financial future.
So even even though many DIY investors have won the game the personal finance game, they feel adrift. And that’s why they felt that they needed to reach out to a financial planner.
The importance of goals in financial planning
One of the things I emphasize during my initial consultation is the importance of getting clarity around the personal goals a household wants to accomplish. Here is what makes a good goal in a financial planning context:
It is either:
An action that a client wants to take in their personal life by a defined date, e.g., “I want to retire at age 65.” OR
It is a personal outcome that the client wants to avoid, e.g., “If I die, I want to make sure my spouse doesn’t run out of money.”
It is an action or outcome enabled by financial planning-related actions.
In other words, the proper way to think about financial planning is the following:
Define Quantifiable Goals with a Defined Time Horizon -> Create Financial Plan Actions to Achieve Those Goals
Everything you do in a financial planning process is about maximizing the chances of achieving the goals that you have.
But for a lot of do-it-yourself investors, their approach is following:
Get rich as quickly as possible -> Figure out what I want to do with my life later
The problems with that approach are the following:
It can be hard to get off the hamster wheel of wealth building, because you haven’t stopped to think about what a pleasant, fulfilling life would be without work. And so you don’t know how much money you need to have your version of a fulfilling life, so you keep working.
Or even if you get off the hamster wheel, you find out that you have an unfulfilling life even with all your money, because you never stopped to ask what would be a fulfilling life.
In fact, there have been several articles over the past several months that demonstrate the downside of a Financial Independence, Retire Early (FIRE) strategy that hasn’t focused on life goals. Here is a quote from a recent article in Fortune about about successful entrepreneurs who struggled once they left their careers behind:
“Many [successful entrepreneurs who have exited their careers] don’t know what they really like or want to do. Even when they do know, they lack a specific goal that can keep them motivated to work on it. While they always had specific targets to hit when they were building their own companies, now they don’t have a specific goal in mind, nor any internal or external pressure. This makes it hard to structure their days or make any plans.”
I am seeing this malaise not only affecting successful technology entrepreneurs, but a wider swath of professionals who have saved heavily and invested successfully over the last 15 years. And invariably the core problem is that these folks have never thought about the goals they wanted to achieve after they got wealthy.
Investing Is Easy, Long-Term Retirement Planning Is Harder
Another challenge that successful DIY investors run into is getting strong confidence that they actually have enough money to retire. A common rule of thumb is to aim to have enough wealth such that you have a withdrawal rate of 4%. So as an example, if you have $4 million of wealth, the rule of thumb would imply that you can spend up to $160,000 per year.
But in practice, that rule of thumb is not so simple. For instance, there is a big difference between having $4 million dollars in your checking or taxable brokerage account vs. $4 million dollars in an IRA. The IRA money would be taxed upon withdrawal at both the federal and state level, so you might have to withdraw $200,000 to $240,000 in order to generate $160,000 of spending money available after taxes.
And there are other less-than-obvious complications with early retirement. Have you considered that in early retirement, you will have to pay for your own health insurance? Or what happens if the market crashes by 30% in the months after you retire?
This is when widely-applicable DIY investing tactics stop being helpful. Because the reality is that while investing best practices are fairly universal, financial planning considerations are very situation-dependent. Just as example, you could be in a great place to retire at age 55. But if you have to provide ongoing financial support to a parent in long-term care or to a sibling who is struggling, the math around early retirement can get a lot harder.
And while most DIY investors have capacity to take lots of risk in their investment portfolios while they are working, that calculus changes a lot in retirement. Most early retirees cannot sustain a 40% decline in the investment portfolio and still achieve their goals. But such a decline is a distinct possibility if an investor is 100% invested in US stocks or has a large concentrated position in a single stock or in cryptocurrency.
And the math around financial planning is hard…that’s why almost all financial planners rely on purpose-built financial planning software. But like most technical software, financial planning software requires not just training on the tool, but also a deep base of fundamental financial planning and investment planning knowledge. While there are a few consumer-facing retirement planning tools, almost all financial planners believe that these tools in their current state are “not ready for primetime” and may provide misleading guidance to those who do not have a deep base of financial planning knowledge. Practically speaking: DIY investing is easy; DIY financial planning is almost impossible.
Have You Thought About Unfortunate Life Scenarios?
Another problem I see in a lot of successful savers’ financial lives is they have underappreciated the risk to their financial lives if they ran into a serious health issue. I have had several clients who have come to me with $1 million+ investment portfolios, but they don’t have an up-to-date will or a durable power of attorney. Everyone needs an estate plan, and that is especially true if you have a meaningful level of assets.
Even more worryingly, most of the high-earning clients who come to me have insufficient disability insurance. (Hint: if you’re a high-earning professional and relying solely on your employer-provided disability plan, you’re probably doing it wrong.)
A similar dynamic is true for life insurance. If you are a high-earning professional and have family members who depend on your income, you probably need at least a couple million dollars of term life insurance. Most clients who come to me usually just have the pitiful basic life insurance plan provided by their employer.
Single-Year Tax Tactics Are Easy, Multi-Year Tax Planning Is Hard
Finally, the last complication that exceeds the capabilities of most DIYers is tax planning. In the go-go working years earning lots of money, tax planning is pretty easy: max out pre-tax retirement contributions, do backdoor Roths if you can, and bunch itemized deductions in a single year to minimize taxes. And most households don’t need a long-term tax plan because for most, the right plan is to try to minimize taxes every year.
However, late career and retirement tax planning is much more nuanced, and there is hardly ever “one right answer.” Instead there are tradeoffs, and strategies are often revised over time because of changes in investment portfolio performance, in the household situation, and in tax law.
Retirement tax planning has gotten particularly challenging with the new rule that Inherited IRAs to non-spouse beneficiaries must be fully withdrawn by those beneficiaries within 10 years - for those who have multi-million dollar retirement accounts, this has created a significant tax planning complication. Now, many households have to think about cross-generational tax planning, even though they won’t have an estate large enough for estate tax to become an issue.
Unfortunately, there is no cookie-cutter approach to multi-year tax planning. The potential tactics to use depend on numerous factors such as the amount of assets you have, the mix of taxable assets vs. tax-deferred assets, the expected amount of required minimum distributions in your later retirement years, your household spending level, your charitable giving goals, your age and your estate plans.
You May Not Need Investment Management, But You Probably Need a Financial Plan
In summary, there is a difference between being a successful DIY investor and having confidence in your financial future. The first step in getting that confidence is actually having clarity on what gives you meaning in life and the things you want to accomplish. Once those goals have been established, you can then develop a plan to achieve those goals, and that plan incorporates not only investment strategy, but also retirement planning, contingency planning and tax planning. But this work is hard - that is where a financial planner comes in.
However, many DIY investors balk at paying an ongoing fee for a financial plan, because they in fact feel comfortable managing their own investments. Fortunately, there are many financial planning firms (including Quiet Wealth) that offer a “one-time financial planning project.” For most DIY investors, this is a very cost-effective way to ensure that they are optimizing their financial life.
(Click here to learn about Quiet Wealth’s Financial Planning Project Service.)
However, investors approaching or in retirement who have multi-million dollar portfolios would likely benefit from ongoing services from a financial advisor. The reason is that as wealth grows, ongoing tax planning becomes a more valuable service. But in order to get good tax planning advice over many years, you have to emotionally commit to entering into an ongoing relationship with an advisor. Quiet Wealth has an Ongoing Advisory Service that includes both investment management and ongoing financial planning, and most of my Ongoing clients have a combination of multi-million dollar wealth and significant, ongoing tax planning issues to manage. People in this situation get to a point in their lives where they just don’t want to “do-it-yourself” anymore, not only because the planning has gotten harder but also because they have other things they want to do in their life, and their time is more precious than their money.
It’s up to you to decide what type of financial planning service is right for you. But no matter what your situation and needs, pretty much all successful DIY investors approaching retirement would strongly benefit from working with a financial planner on either a one-time or ongoing basis, because that is likely the only way you can get confidence not just in your investments, but in the alignment of your financial resources and your life goals.