A common question that we face from people who self-manage their finances is: why use a financial advisor?
When it comes to managing their investments, many people do choose to work with a professional. In fact, almost two-thirds (61%) of people with a long-term financial plan sought an expert’s help to create it, according to a November 2018 poll by Kiplinger’s Personal Finance and Personal Capital. This is good news because almost everyone can benefit from working with an advisor.
Think about it like this: Most people regularly take care of their cars, pumping their own gas and putting air in their tires. But for more complex tasks—such as checking brakes or changing spark plugs—a lot of us leave the heavy lifting to an expert.
The same holds true for handling your financial life. While there may be times when going it alone makes sense, there are many instances where getting professional advice is a smart move.
So, Why Use a Financial Advisor?
Some taxpayers work with a CPA each year to help prepare and file their income taxes, while others choose to use online DIY tax preparation software. But there’s a big difference between tax prep and tax planning. For example, a financial professional can help identify ways to optimize your tax bill for the long term. Say you’re a successful entrepreneur weighing whether to sell your business or go public. When you have a major liquidity event on the horizon, advance planning or the tax implications is critical.
Even everyday investing decisions can have big tax consequences. Tax-sheltered accounts are good for investments that pay dividends and interest because no tax is owed until the money
is withdrawn (if it’s a Roth, you never have to pay taxes on that income).
Taxable accounts, on the other hand, are better suited for investments such as growth stocks. That’s because those gains, when held in taxable accounts, are only taxed 15% or 20% for most people. A professional financial advisor can help you sort through these choices.
Managing Healthcare Costs
In the Kiplinger’s/Personal Capital poll, respondents identify high healthcare costs as the number one worry about their future retirement. It’s also the top reason they’re not saving as much as they would like to now.
Just as an financial advisor and client collaborate to make investment decisions, they can also work together to manage the cost of healthcare. For example, perhaps you and your spouse both have access to health insurance through an employer. An advisor can help determine which plan is the better option to meet your needs. He or she can also offer guidance on funding tax-advantaged Health Savings Accounts or evaluate the pros and cons of purchasing long-term care insurance.
Monitoring Your Investments
Smart investors know that most investment portfolios need ongoing care and attention. Say you and your advisor decide it makes sense (given your personal goals) to invest 60% of your portfolio in stocks, and that the rest will go in a mix of bonds and cash. But if the value of your stocks falls by 20% over the course of a year, while your bonds increase, you will need to rebalance your portfolio to course-correct.
A professional advisor (especially a fiduciary who is legally obligated to act in your best interests at all times) will check in with you regularly and monitor your investments to help keep your plan on track.
Making Your Money Last
How you withdraw and spend money in retirement can make a big difference to the longevity of your portfolio. An advisor can help you determine which accounts—and in what order—you should withdraw from to minimize taxes on your retirement income.
Even better: Investors who work with a Personal Capital fiduciary professional now have access to a tool called Smart Withdrawal. This client-only feature uses advanced tax forecasting to predict your optimal account withdrawal in retirement. The tool provides year-by-year guidance; all you have to do is provide a few financial data points, your state of residence, and your retirement spending goals.
This article originally appeared in Kiplinger’s Personal Finance.