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The Perfect Balance Sheet

I’ve had the unique benefit of working with high net worth retirees, and now young professionals. This helps me to understand how older individuals and families have had success building a balance sheet - which influences my advice around helping those at the start of their career build a balance sheet that is set up for future success.

There are many different ways to get there, and I’m not making a post on how to build larger assets, but rather what the assets look like on a balance sheet. Call it the quality of the balance sheet, not the quantity.

Retirement is often called the “decumulation” phase - the time when one switches from accumulating assets, to decumulating, by using their assets as an income replacement. My hope with this post is to give a road map, or factors to pay attention to when accumulating assets so that you have a great decumulation phase.

I want to make it clear that this is just an aspect of your financial standing - it doesn’t account for how you’re building your balance sheet (as an employee, business owner, etc.), how you’re protecting your assets (e.g. insurance coverage that you have), or how the money will pass to your heirs (Will, POAs, beneficiary designations, etc.). These are all part of the puzzle, but this blog is solely about what is contained in the balance sheet for one’s individual success.

And one other point - maybe your situation is different and you’re not looking for the same standard retirement. You want to FIRE at 35 or have so much money that you’re more focused on passing it to the next generation than your own retirement. This can certainly change how the balance sheet may be set up, but we’ll leave that out of scope for this post.

Here are some of the major points I want to talk about:

Asset Location

The biggest point I want to make in the post is about where you are saving money. There should be a goal of having equal balances among your investment assets with Roth retirement accounts, pre-tax retirement accounts and after-tax (non-retirement) accounts. It doesn’t have to be perfectly distributed among the three, but it is a good goal to get close to it.

There are some unique situations where this may change, but I think this is the goal when it comes time to retire. This way, you have different options to pull from, which gives you more control over your taxes.

There are times when it doesn’t make sense to do this while you’re accumulating. For example, a doctor right out of school, pursuing PSLF. They should likely focus on the pre-tax bucket first while they’re in a high income tax bracket and on a student loan income-based repayment plan. But, they can also be contributing to their Health Savings Account, backdoor Roth IRA, and consider conversions or mega backdoor Roth strategies when it makes sense in the future to get closer to an equal Roth allocation.

I also want to point out that I encourage using an HSA and building that balance! I love seeing a high balance in an HSA, as I know that money has never been taxed by the IRS. HSAs are not the most effective when it comes to passing money to your heirs, so in retirement I like to see that money start to be used. But as an accumulator, you should try to max it out each year and not touch it, if possible.

Organization / Titling

In my opinion, the same holds true with investment portfolios and balance sheet assets - the simpler the better. You don’t want a balance sheet with a lot of assets (in terms of number of assets, not size of assets), in numerous banks that you’re having to keep track of.

There are certain strategies with this - like having a few cash accounts because FDIC insurance covers $250k/bank and you want to optimize this. But having six 401(k)s, because you never did anything with them doesn’t look great. Keep things consolidated the best you can, as it will add simplicity to your life. When you leave a job, make a plan to roll it over to an IRA or new 401(k) so you don’t have to worry about tracking or managing another account.

The same goes for your checking and savings accounts - I don’t like to see more than two banks. This will just keep things simple so you’re not paying bills from numerous accounts, worrying about having enough funds in all your accounts… keep it low maintenance and have systems set up so that one account controls cash flows to investment accounts, savings accounts, bills, etc. This can help a lot with tracking and understanding where your money is going; one account has the money trails, as opposed to having to piece together multiple different accounts with similar activities.

Finally, a quick note about asset titling. The way you title your assets is important, but everybody has their own method, and states have different laws for titling and asset protection.

I generally like to see spouses use joint accounts or trusts for estate planning simplicity, but I also know many couples like to keep things separate or have other systems of their own. I totally support that if it works for you, just make sure you know how things are titled and what that means if something were to happen to you.

With asset protection, each state is different. But this can have an effect on where you have your money. Sometimes your home equity is fully protected, so you may consider paying off the mortgage. Or, sometimes 401(k)s are asset protected while IRAs are not. If this is important to you, make sure you’re considering this when rolling over old retirement accounts.

Other Assets

If there comes a time when you want to build new or unique assets, that is up to you. I’m not going to be a buzzkill and say that is wrong, but there are some classic assets and investments for a reason - they work! In my opinion, the best balance sheet has boring assets, like retirement accounts, low cost index ETFs, etc.. But if you have the itch to use other assets, you’re not alone, and I won’t be the buzzkill that says to never invest in these. But, I don’t condone most of them. Here are my thoughts on other common assets I see:

House: this most common asset. I definitely like to see this at some point, but if you know from many of my LinkedIn posts, I don’t think a house is all it is cracked up to be. I’m in favor of not buying a house at the start of your savings journey, but I encourage eventually having a *modest* house on your balance sheet.

Permanent life insurance: I hate to see this on a balance sheet. I know in theory there are times that it makes sense, but I’ve never come across this for an actual client. And, it can be pretty painful and costly to get out of it - so why not keep it? Because it is even MORE costly to hold on to it. Avoid permanent life insurance, which comes in the form of whole life, indexed universal life, variable life, etc.. This is not an accumulation asset, no matter what salespeople tell you.

Company Stock Concentration: Having a high concentration in one stock can be lucrative, but also dangerous. Especially when it is your employer’s company stock - your income, benefits (like health, life and disability insurance), and now your investments are all tied to one company. I’m not going to say that some individuals don’t get extremely wealthy from this, but my opinion is that it is not worth it - since there are many that lose a lot from this. Take advantage of an ESPP or equity compensation, but sell the shares once they are delivered and get that money diversified. Aside from the financial considerations, you will have less stress knowing that your entire financial health isn’t reliant on just one company doing well.

Cars: These are “luxury” assets in my opinion and are super dependent on the person / family. I favor owning one or two cars over having leases, but as we know, times are crazy right now and I can’t confidently make a blanket statement of what is best. I just encourage you to not have multiple cars for each person, and stay modest on these purchases. Cars suck a lot of cash, so minimize this, if possible.

Rental property(ies): I’m not for or against rental properties. I can’t deny the benefit of having the cash flow, a real asset, and some tax advantages that come with them. But I also can’t deny the extra work to get those benefits - it is very similar to running a business. If you’re into that, power to you. But rental real estate is certainly not a requirement for creating wealth or retiring with cash flow. It is not for everybody.

As we know there are a million other assets I didn’t mention: crypto, NFTs, physical artwork, gold, boats, etc. And to these I say “eh”. They actually bring me more concern when seeing them on a balance sheet than excitement for their financial standing. Some of them can have their place or their benefits, but my opinion is that they should generally be avoided.

Thoughts on Debt

Debt can get pretty complicated, so it is hard to say what kind of debt the perfect balance sheet would have. When it comes to retiring and decumulating, you should ultimately have no debt (unless you have a rental or it is linked to some other investment).

But as an accumulator, I think debt is perfectly acceptable, if not preferred. Avoid some of the consumer debts like credit cards or personal loans. Those are almost never good, unless they’re 0% and you’ll pay it off before that changes.

But I fully encourage making standard debt payments while also building retirement accounts and investments at the same time. It doesn’t make sense to me to have to get rid of all debts before investing. Do them at the same time.

For car debt, if it is a rate lower than 5% then I typically encourage to just pay it off with the standard monthly payments.

As we know, student loans get tricky. Sometimes it makes sense to pay as much as possible to them, sometimes it makes sense to pay the standard monthly payment, and sometimes it makes sense to pay as little as possible. Have a plan to get these loans paid off or forgiven within 20 years.

Finally, I think mortgages should be paid off with the standard 30 year payments. Take your time - typically these have lower mortgage rates, are tax deductible for some, and your payments actually get smaller in real terms every year - one of the only times we like inflation!

Moral of the story with debt - have a plan and work to pay it off in tandem with building other assets, unless there are the extreme cases of 10%+ interest rates with consumer debt.

Final Thoughts

Ultimately, everybody has a different situation, so I’m sorry for the click-baity title of the perfect balance sheet. But there should be attention around how you’re building your balance sheet based on your end goal of retirement - whatever that looks like.

The last thing I’ll say is that this is a journey. I know for many of us in our 20s or 30s, retirement is so far away! But if you're saving in retirement accounts, then you’re planning for retirement and you should have some strategy behind it.

As a young professional, you may also want to focus on building after-tax accounts before retirement so you can save for a house, a family, more vacations while you’re young and able, etc. In this scenario, you should definitely do this! I even wrote about it in a prior blog post called Investing Outside of Retirement Accounts. But this is a journey, and the end goal for many of us is financial freedom from work - and building a balance sheet that supports that freedom should be the focus over the long-term journey.


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