Creating & Preserving Wealth

The Hierarchy Of Income Planning

Patience, and knowing the rules, is often the most successful strategy

by Gregory Fortier, CFA

Mr. Fortier is affiliated with Centinel Financial Group, LLC in Marshfield, Massachusetts. Visit

Quickly google “creating wealth” and you are bombarded by search results of get rich quick schemes, stories about self-made millionaires, and the expected self-help books for sale. The reality for most of us is that creating wealth will be more a story of simply gaining the correct knowledge and taking time to plan rather than founding the next tech company to IPO, skipping the daily latte, or going all in on bitcoin. If you’re going to win, like in any game, you must first know all the rules.

Rule #1: Prioritize

Another realization is that building wealth is not the sole goal unto itself. There are many goals, even competing goals, on your hierarchy. No matter your income level, there is only a finite amount of dollars to allocate. For many, budgets are torn between normal living expenses, contributing to retirement, paying off mortgages and student loans, saving for your children’s education, saving for a first or second home, charitable contributions and building or maintaining an emergency fund. Start by prioritizing your savings and debt buckets. I am shocked to commonly see folks make accelerated mortgage or student loan payments instead of contributing to their 401k account that offers a match. The match is free money! That is a 100% return, doubling your investment. The next layer of priorities is more unique to the individual’s situation and prioritizing tax advantaged accounts.

Rule #2: Take Advantage of Tax Law

You can certainly save your way to creating wealth but it’s going to take more than skipping the daily latte. Do you know what your largest single expense is? For most people, they don’t think of taxes as an expense – but it sure is! If you are like most Americans, it is one of your highest spending categories. Uncle Sam offers encouragement for savers, but you must know the rules to make the most of it. Realizing when to make Roth retirement contributions as opposed to traditional, when to execute a Roth conversion, make a non-deductible contribution and what asset types to house in the different accounts is powerful knowledge.

For those that do a great job saving and building retirement accounts they could easily find themselves paying more in taxes come retirement than they do in their first few working years. Don’t make the mistake of taking a tax deduction now through traditional contributions only to pay a higher tax rate in the future. Roth contributions allow investors to pay income taxes at their current rate and have the earnings grow tax free. After Roth IRAs were introduced in 1997, annual retirement contributions grew 50% by 2000. 1

Many investors clearly saw the advantages. Take a breath and ask yourself a simple question: Will your tax rate be higher in retirement than it is now? If you answer “Yes”, then a Roth strategy can save on taxes. If you answer “No”, then a traditional contribution will allow for compounding returns on a higher asset base through tax deferral. Investors should discuss the greatest tax shelter for their situation with their financial advisor.

We covered a few tax advantaged accounts, now let’s talk location optimization. This refers to what types of assets (such as stocks or bonds) to hold in tax advantaged accounts as opposed to a taxable account. Investors should pay careful attention to place highly taxed assets such as bonds in retirement accounts. The same strategy can be applied to portfolio management. A strategy with high turnover would be better suited in a retirement account and a buy and hold strategy held within a taxable account. By doing so, the taxes on the interest income through bond holdings and short-term gains can be deferred, allowing compounding interest to grow on a larger asset base that would otherwise be shrunk by taxes.

College savings is another area where a tax advantaged account can cut your tax bill. A 529 plan allows for funds to grow tax free as long as the money is used for qualified education expenses. For example, a family that invested $100,000 into a 529 plan over the years and is now worth $300,000 could save $40,000 in taxes.2 As college costs continue to climb so does the impact of proper planning.

It’s hard enough to get ahead, when Uncle Sam offers a bit of encouragement know the rules so you can make the most of it!

Rule #3: Take Action

What was the point in learning all the tax info above if you don’t do anything about it! Many diligent savers never take action to invest their savings. 58% of Americans’ assets are held in cash.3 The average savings account earns 0.09%4. While it’s important to maintain emergency savings it’s safe to say that most Americans are missing out on the powerful impact of compound interest. Even worse – they are losing money to inflation! Over the past decade, inflation averaged 1.8%5. If you have $100,000 on the sidelines for the next 10 years your inaction could cause you to lose over $18,000 just to inflation! Many folks seeing the market at all-time highs are apprehensive. It’s important to remember that the S&P500 averaged about 8% annually6 since the index adopted 500 stocks in 1957 and over the past decade averaged 13.56% annually7. Don’t let inflation erode your hard-earned savings through inaction! Now, many may say it is not inaction but fear over investing in the market when it is at an all-time high. For those people, I say read on to Rule #4.

Most folks have heard about the fallacy of market timing, nonetheless most folks fall into its trap. The average investor has underperformed the market by 4.6% over the past two decades. Investors are selling at the wrong time or waiting for the perfect buying opportunity that never comes...

Rule #4: Be Disciplined and Automated

Most folks have heard about the fallacy of market timing, nonetheless most folks fall into its trap. The average investor has underperformed the market by 4.6% over the past two decades.8 Investors are selling at the wrong time or waiting for the perfect buying opportunity that never comes. Plain old procrastination is another big drag on investor performance. One of the most successful innovations in behavioral finance is the auto enrollment feature within 401(k) plans. When retirement plans offer this feature participation rates are 42% higher!9 Another innovation, the auto escalation feature automatically increases a plan participant’s savings each year. A U.S. News article compared two savers age 25 who earn the same salary, start with the same savings rate and earn the same return. At age 65 the employee who elected a 1% auto escalation had more than double the 401k balance.10 Maybe he paid for the retirement party? Disciplined investing combined with compounded interest has an astounding effect!

Lifestyle Inflation catches many folks by surprise. I often hear, “I used to live off X amount, now I am earning 5 times that and can’t seem to save money.” One of the best ways to avoid this is to revisit the financial plan annually and automate savings. Many of my clients contribute monthly via automatic deposit to retirement as well as non-retirement accounts. If this automation feature did not exist, neither would most of the funds they saved!

Investors should be aware of the many cognitive and emotional biases that lead to inefficient portfolios. With the market now at all time highs, I see many younger clients exhibiting regret-aversion bias. This results in inaction or a far too conservative portfolio for the intended goal. Revisiting the goal’s time horizon, structuring an appropriate asset allocation, and implementing a disciplined dollar cost average strategy with the expectation of market volatility can help to successfully get the plan on track. Equally as dangerous is status quo bias, the tendency for investors to leave everything as is. Investors getting closer to retirement should look at de-risking, although many are reluctant to do so as their equity holdings have shown strong growth. Those who fail to de-risk could be in for a surprise if the market cools just as they retire and withdrawals exacerbate the decline further reducing the probability of the account balance recovering. Working with clients, I suggest reviews at regular intervals to ensure that the risk of the portfolio along with the timeline is revisited.

Rule #5: Get Guidance

We finally reached the last rule – and the most important. As you embark to create wealth, outlining a financial plan with the right advisor can ensure that your goals are identified and prioritized, tax advantages are not left in the unknown, a disciplined strategy is implemented, and your progress toward your goals is measured.





1 Federal Reserve Board, “Flow of Funds Accounts of the United States, First Quarter 2004” (10 June
2004), Table F.225.i, p. 112
2 Assuming 20% tax in long term cap gains
3 3(BlackRock’s Global Investor Pulse Survey,
6 Brighthouse Historical Price Returns 1901 CLVA602812
8 J.P Morgan, December 31, 2018. Average Investor Performance since 1998 = 2.8% while the S&P500 Index Average Performance since 1998=7.2% (BH Marketing piece)
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