If you can build a diversified portfolio with a handful of low-cost index funds, why would you pay a financial advisor?
It’s a fair question—and one that gets to the heart of how the role of a comprehensive financial advisor has changed.
For someone approaching or living in retirement, the real complexity often lies not in any one decision, but in understanding how each decision affects the others.
Retirement Decisions Rarely Happen in Isolation
Consider something as simple as determining where your cash flow should come from.
A retiree may have assets in a traditional IRA, a Roth IRA, and a taxable brokerage account. All three accounts can provide cash. But they can have very different tax consequences.
A withdrawal from a traditional IRA is generally taxable as ordinary income. Selling investments from a taxable account may generate capital gains, while qualified Roth withdrawals may create no current taxable income at all.
That means the question is not simply:
“Which account has enough money?”
It may also be:
“Which account makes the most sense to use right now?”
And answering that question often requires looking far beyond this year’s tax bill.
Sometimes Paying More Tax Today Can Make Sense
The early years of retirement can create an unusual tax-planning opportunity.
Someone may stop receiving a paycheck before beginning Social Security or required minimum distributions from retirement accounts. As a result, their taxable income may temporarily fall which creates a potential Roth conversion opportunity.
A Roth conversion creates taxable income in the year of the conversion, so it can seem counterintuitive to voluntarily increase a tax bill. But minimizing taxes this year does not always mean minimizing taxes over your entire retirement.
Paying tax at a potentially lower rate today may reduce the taxes paid later, when Social Security, required minimum distributions, and other income sources will all be arriving at the same time.
The analysis can extend beyond your own lifetime as well. In some situations, intentionally paying more tax today may ultimately reduce the tax burden on the assets you leave to your children/heirs.
Good tax planning often requires looking several years—or even decades—ahead.
Tax Planning Can Affect Medicare
But a good retirement strategy doesn’t just stop at tax planning.
For retirees on Medicare, income can affect Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount, commonly known as IRMAA. Medicare generally uses the income from two years prior to determine what these additional premiums will be.
So a Roth conversion that increases taxable income today may result in higher Medicare premiums two years in the future. That doesn’t automatically make the Roth conversion a bad idea. It simply means that Medicare should be considered alongside the potential long-term tax benefit.
This is a good example of why financial decisions should not be evaluated in isolation.
Social Security is Part of the Same Conversation
Social Security creates another layer of planning.
A retiree with sufficient portfolio assets may have the flexibility to delay Social Security rather than claiming immediately. Whether that makes sense depends on many factors, including health, longevity expectations, spending needs, taxes, your spouse’s age & benefit, etc.
For example, if the higher-earning spouse has a full retirement age of 67 and delays Social Security until age 70, their monthly benefit increases by 24%. Because a surviving spouse may be eligible to step up to the deceased spouse’s benefit, delaying can also increase the survivor benefit available to the other spouse.
But maybe this couple wants to travel early in retirement and values having more cash flow today. They may decide that claiming earlier better supports the retirement they actually want—even if delaying could produce a larger monthly benefit later. But of course…
Those early benefits affect taxable income.
Taxable income affects Roth conversion opportunities.
Roth conversions can affect Medicare premiums.
And all of those decisions can influence how much needs to come from the portfolio.
What appears to be a Social Security decision can quickly become a tax, cash-flow, and investment decision as well.
The Investment Portfolio Should Support the Plan
This is where investment management comes back into the conversation.
The investment strategy that worked well during the accumulation years may not be the same strategy someone needs once the portfolio becomes a source of retirement income. Now that they’re withdrawing from their portfolio, near-term cash needs are going to reshape how their portfolio should look. And those near-term cash needs in retirement can get complicated in a hurry.
Not to mention, many retirees discover that risk feels very different once the paycheck stops. During the working years, a market decline may feel like an opportunity to continue investing at lower prices. In retirement, watching the portfolio fall while simultaneously depending on it for income can feel very different. A risk tolerance that seemed comfortable at 55 may not feel nearly as comfortable at 65.
There is no single retirement portfolio that is appropriate for everyone. The investment strategy should reflect the retiree’s spending needs, tax situation, time horizon, risk tolerance, other income sources, and the role the portfolio needs to play in the broader financial plan. We believe the portfolio should be built around the retirement plan, rather than building the retirement plan around the portfolio.
The Value of Comprehensive Advice
A comprehensive financial advisor is not simply trying to sell you on a templated portfolio.
The role is to understand the entire financial picture and recognize how decisions about spending, taxes, investments, Social Security, Medicare, estate planning, and other areas may interact.
That is why we often describe our role as serving as a Family CFO.
The goal is to help clients understand their options, make thoughtful decisions, prepare for the unexpected, and coordinate the many parts of their financial lives.
Investment management remains an important part of that work. But the greatest value of comprehensive planning comes from making sure the decisions surrounding the portfolio are working together, as well.
Bonus
We recognize that no financial advisory firm is the right fit for everyone. What matters is finding an advisor whose approach, expertise, services, and personality fit what you are looking for. If you’re searching for an advisor, the following directories are useful places to start:
NAPFA Find an Advisor: https://www.napfa.org/find-an-advisor
XY Planning Network: https://connect.xyplanningnetwork.com/find-an-advisor
Garrett Planning Network: https://directory.garrettplanningnetwork.com/search-member-profiles?_ga=2.171133536.1567607404.1782390870-1716545203.1760973627
Find a CFP Professional: https://www.letsmakeaplan.org/find-a-cfp-professional
And if you’re not sure what type of advisor you should be looking for, we’re happy to be a resource. Even if Van Nostrand Wealth Management isn’t the right fit, we believe good financial planning makes a meaningful difference in retirement, and we’re here to help you find it.
