The Advantage of Efficiency

Friday, November 2nd

On June 1st of this year, Ross Edgely dove into the ocean off the coast of Great Britain and he has been swimming his way around the British isle ever since.  This Sunday, November 4th, he is scheduled to complete his swim around the entire coast of Great Britain at Margate, after logging 157 days and 2000 miles in the North Atlantic and the North Sea.

The feat has required him to be in the water 12-14 hours a day, swimming roughly the equivalent length of the English channel every single day.  Along the journey, Edgely has faced enormous obstacles including jellyfish swarms, powerful currents, gale-force winds, crushing waves, ice-cold water, night swims, and a disintegrating tongue due to ‘salt mouth.’

A recent article explained that Edgely has to consume 15,000 calories a day to exert the amount of energy he needs for his swims, but the state of his tongue is making eating difficult.  Edgely credits the humble banana for powering his record-setting swim.

Edgely said, “[The banana] has become the unsung hero of the Great British Swim.  We never really planned to eat this many bananas, but it was somewhere along the south coast we discovered that the banana was the most efficient fuel source.  They are neutral in taste, soft, and most importantly, perfect for the salt mouth.”

Edgely’s swim requires him to be efficient with his energy expenditure and his calorie consumption.  He has a dietician and a trainer on board his support boat.  Everything is planned, measured and recorded.  Everything he puts in his body has a purpose and a function—to get him safely through his swim.

Your retirement plan should be designed with the same kind of efficiency and deliberate planning to get you safely through retirement.  Efficiency is a key strategy in many areas as you work towards your retirement goals and throughout your retirement.

Fee Efficiency – When you invest your money there are always fees involved. It’s important to understand, however, that fees do not correlate to fund or investment performance.  In fact, in many cases, there is actually an inverse relationship with the cost of the fund and the performance of the fund.

Every year Morningstar publishes an annual report and looks at how actively managed mutual funds are performing against the benchmark.  In one report they wrote, “Higher cost funds are more likely to underperform.  Fees matter.  They are one of the only reliable predictors of success.” 

In other words, the more the fund costs, the more likely it is to underperform.

Unlike other products, where higher priced items have a presumed higher quality, it seems that the exact opposite holds true in investment expenses.  Morningstar also noted that, “in every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”

In many cases, people are grossly overpaying in fees and it is affecting the overall performance of their portfolio.  Most have no idea what their investment fees are really costing them.

We recommend that you take a careful look at all the fees that you are paying and if you are getting enough value from paying those fees.  You must ask the questions: “Am I getting a better return, taking less risk, or both when compared to the index or benchmark?  What did I pay to produce these results?  If your returns and your risks are comparable to cheaper vehicles, it makes more sense to pay less for the same outcomes.

The more efficient you can be with your fees, the more money you get to keep and the more money you ultimately have to invest with.  Attaining optimal fee efficiency can be like getting an extra 1-3% return on your money.

Tax Efficiency – The way to maximize your tax efficiency is to always pay the least amount in taxes as you have to. Rocket science, I know.  This means that you should put your money in a variety of vehicles that will allow you to withdraw from your accounts in the most tax efficient way possible.

Since we cannot predict the future or the future tax laws and income brackets, it’s important to diversify your accounts according to their tax ramifications, investing in tax-deferred, tax-free, and taxable accounts.  This gives you some flexibility to adjust to any changes in the tax code at any time.

For example, if all your money is in tax-deferred accounts and tax rates go up, you may end up paying taxes at a higher rate during retirement than the rate you currently pay.  On the other hand, if you diversify some of your money into tax-free accounts and tax rates go up, you can strategically withdraw deliberate amounts from both kinds of accounts in a way that allows you to remain in the lower tax bracket and pay less in taxes.

It’s important when considering your tax strategy to look long range.  Many times your accountant just wants you to pay the least amount of taxes today.  I get that.  Turns out I don’t like paying taxes either.  But sometimes it makes sense to pay a tax today in order to possibly reduce a larger tax bill down the road.  Having a variety of accounts, both taxable and tax-free, can allow you to maximize tax efficiencies and give you the ability to appropriately adjust and adapt your financial plan throughout retirement.

Income Efficiency – As you manage your income streams during retirement, it is important to maximize your income efficiency. This means being able to generate the most income while also making sure you don’t run out of money.

The challenge is that because we are living longer, many studies show that you should withdraw less than 4% per year to make sure it lasts as long as you do.  This means that you can expect less of your retirement income to come from traditional retirement accounts.

Determine the income you need to generate during retirement and then carefully evaluate your income stream options.  It will be important to assess when is the best time to begin taking your Social Security or pension benefits.  Can you afford to defer taking your benefits in order to increase the amount of these income streams later on?

Another way to generate more efficient income streams is use an annuity.  Annuities allow a much higher withdrawal rate (often more than 5%) and they guarantee the income for life.  This can be a valuable tool in a comprehensive financial plan.

Depending on your circumstances, you can work with your financial advisor to create a comprehensive plan that will give you the best income efficiency for your retirement dollars.

Whether you are facing 8-foot waves and a monstrous current in the North Sea or 40 years of well-earned retirement, it requires deliberate design and absolute efficiency in every area of your plan.  Evaluating and adjusting your portfolio to increase your fee, tax, and income efficiency can make all the difference in getting the outcomes you want in retirement.

At Acute Wealth Advisors we specialize in efficiency.  We can help you look at your current setup and customize a retirement plan that takes advantage of every efficiency to help you reach your goals.  Contact us today.

Matt Deaton