By Tom Sedoric and Casey Snyder

Holiday decorations are coming down, you’ve had your fill of Christmas cookies, and you’re probably more than ready to kick up your feet by the fire for the rest of the season. There’s just one last thing to accomplish before we get too far into 2022—reviewing your investment distribution strategy for the upcoming year. 

Ugh, right? The to-do list is relentless. But this financial planning activity is essential, and future you will thank yourself for giving up a few hours of relaxation to do this critical task. A sound investment strategy is constantly evolving, which means it’s crucial to make updates each year. Here’s how to analyze your distribution strategy and ensure it aligns with your goals so you can enjoy well-deserved relaxation for years to come. 

How to Analyze Your Distribution Strategy 

Your goals, objectives, and financial situation are never stagnant from year to year. They’re constantly shifting and evolving as you age and life circumstances change. That’s why your distribution strategy should be reviewed in the context of the previous year and the years ahead. People often evaluate distribution for a single year, which is at the expense of their future. 

A good investment strategy reflects several factors: 

  • Where you’re headed in life: A beachfront retirement home or a rental near family? You’ll likely have already discussed your retirement wants, needs, and goals with a fiduciary.  
  • How you plan on getting there: What’s a goal without a plan? Your fiduciary will help you map out the steps you need to take to reach your goals.  
  • What your specific objectives are: For example, is charitable giving important to you? Or, maybe you want to leave a large estate to your children. Outline those goals. 
  • When you want to achieve them: Setting a timeline is key to making progress towards achieving goals. 
  • What level of risk you’re willing to accept to reach your goals: Assess your risk tolerance to understand what you can tolerate when the markets invariably vacillate.

Think about what you need in the future. How much do you want to withdraw to spend in the coming year? Where do you pull it from? How might this affect your estate plan? Without taking the time to sit down and truly understand your needs, you might as well flip a coin and hope for the best when it comes to your financial future. 

Tax Efficiency 

Pay particular attention to your income sources, account balances, how distributions from each account are taxed, and the current tax code. We recommend meeting with an accountant to better understand the current and projected tax liability. As the tax code evolves, it’s crucial to develop a game plan to respond. Many tax brackets are expected to condense in the coming years, so people may find themselves in a higher tax bracket than expected. An accountant can help make sense of those changes to the tax code and set you up for success. Charitable planning comes into play in this process as well. How can you improve your tax exposure and accomplish charitable giving simultaneously? 

Here at The Sedoric Group, when requested we share projected cash flows and future spending goals with our client’s accountants. This provides accountants critical context to help create tax efficiency for the future.

Risk Tolerance 

Risk creep—also known as price creep—is also worth noting as we head into 2022. In recent years, aggressive (a.k.a. growth) strategies have made up a larger percentage of balance sheets than people may have originally intended, simply because this segment of the markets has performed so well for the last decade. 

We know that these returns can’t last forever. The market’s stellar performance has distorted the expected return on investment, and investors need to re-think their expectations as we move into an uncertain future. 

Your investment distribution strategy is meant to accommodate all these pieces and must align with your goals (spending, charitable giving, and otherwise), and create tax efficiency for the future. If you don’t do this planning, you may end up paying more taxes in the long run, have an inefficient estate plan and charitable strategy, and may end up with more risk in your portfolio than you can afford or intend to have. 

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.