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THINKING BEYOND STOCKS, BONDS AND MUTUAL FUNDS IN A FINANCIAL PLAN
If there’s one thing that a championship quarterback knows, it’s that it takes more than one player to carry the load. And when it comes to building wealth, the same holds true for investment vehicles.
Peter Graham Jr. led the University of Notre Dame to a national football championship in 1988, then worked on Wall Street for twenty-five years, all the while ignoring requests from his dad to join Navesink Wealth Management, the financial advisory business that his father founded. At home in Darien, the younger Graham set up endowments for local nonprofit groups (he helped raise close to $10 million for the Darien Athletic Foundation), leading to hundreds of meetings with prospective donors. In the process, he discovered this: “In the area we live in, many people have the impression that we are sophisticated investors. Maybe a little ego comes into play—you have the fancy car and the big house. Maybe you’re afraid to ask questions.”
Says his dad, “So many people are moving forward making all that money—maybe they’re fixated on whether or not they are beating the S&P or the Dow—but there is a lack of planning for other things, like insurance, taxes, legal documents. We work with the what-ifs.”
Father and son joined forces in 2015. Together they’ve discovered that while many folks here fund their 401(k)s and their 529 college plans with stocks, bonds and mutual funds, they miss the big picture. Asset allocation goes beyond figuring out which stocks and bonds to put in which basket, the elder Graham says. “We do a financial plan based on where they want to be and how to get there. Then we do an asset allocation.” Here’s what they suggest:
Stop procrastinating. A few years’ delay in investing can mean a six- figure difference down the road. A firm like Navesink can manage your assets for a fee, or, if you’re a do-it-yourselfer, provide a financial checkup and plan that costs about $2,500 (a reasonable outlay, considering the consequences).
Buy term life insurance.
The Grahams were working with the young parents of two little girls when the father developed colon cancer and died. “When you lose that income, it’s devastating,” says Peter Sr. Make sure you have a hedge—in this case, a term-life insurance policy—that can support your lifestyle at least for the short-term if there’s a catastrophe. A million-dollar policy for a twenty-year term might cost a healthy forty-year-old about $1,000 a year.
Consider a nonqualified annuity.
Annuities get a bad rap, because historically they’ve come attached with high and hidden fees. But greater transparency has led to more competitive products. If you’ve maxed out on your 401(k) contributions and you’re looking for a way to invest cash in excess of those limits, a nonqualified annuity (which is funded with after-tax dollars) allows your nest egg to grow tax-deferred. Ask your adviser to explain the fees and commissions.
Buy and hold real estate.
Where else can you secure a $500,000 investment, for example, using $100,000 down? The investment can generate rental income or long-term appreciation. “I had a client who bought a house for rental for every child born, with the intention of selling the house when each child goes to college,” Peter Sr. says. “It’s a great avenue to appreciate money.”
Explore a franchise.
Lots of folks around here are buying into franchises, reports Peter Jr. One client opened Pilates studios, another opened car washes. Says Peter Sr., “These individuals are looking for nonpassive investments,” because they are still in their earning-power prime.
THE BACKDOOR ROTH
OPTION FOR HIGH-INCOME EARNERS
It’s great to be able to invest your before-tax money into a 401(k), and to let your returns compound tax-free until you take them out, but there’s a limit to how much you can stash in there. A Roth IRA lets you contribute your after-tax money into a retirement account, where your investments grow tax-free without a minimum distribution requirement. If, like many earners in lower Fairfield County, though, you earn too much to invest in a Roth IRA (more than $203,000 for a couple filing jointly), the Grahams suggest exploring a backdoor Roth, in which you contribute to an IRA, then in short order convert it to a Roth. There are some important caveats, so be sure to talk about the details with your financial adviser.