Plan Better: Financial Strategies vs Tactics

Oftentimes we make decisions about our portfolios based on what we think is the smartest move. Yet when we do that, we can lose sight of the bigger picture. 

In this episode, we’ll discuss how the context in which you view your portfolio can steer your financial decisions for years to come.


Questions answered:
What’s the difference between financial strategy and financial tactics?
What are the key pitfalls to avoid?

Time stamps
0:00 Intro
1:15 Losing focus on the bigger strategy
2:40 Example of focusing too much on tactics
6:40 Your tactics would be…
7:45 Why Roth conversions aren’t always the right choice
8:50 Example of winning the battle but losing the war
11:00 Make sure you’re prioritizing strategy
11:20 Summary
11:54 Outro

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Transcript

Peter Drucker's, one of the most widely known and influential thinkers on management, and he famously said, efficiency is doing the thing right. Effectiveness is doing the right thing. In other words, you can be incredibly efficient while still being horribly ineffective. They are two different things. So how does this relate to financial planning?

Well, I believe you can relate efficiency to tactics and effectiveness with strategy. So put it another way. You can perfectly implement all the right financial tactics, but completely miss the strategy. The goal of a truly effective financial plan is to start with the right strategy and then align your tactics to support this.

So today we're gonna break down the difference between your financial strategy and the financial tactics that you use to get there. And I'm gonna highlight some key pitfalls to avoid. This is another episode of Ready For Retirement. I'm your host, James Canole, and I'm here to teach you how to get the most outta life with your money.

And now onto the episode. I wanna read that quote one more time before we jump in today, because this applies to all aspects of life, not just management, not just finance, but to everything. And again, it's efficiency is doing the thing right. Effectiveness is doing the right thing. Now, this may not be a perfect analogy, but I do believe it highlights a problem.

I see a lot, and the problem is people become so focused on the right tactics, they lose sight of the bigger strategy. So we're going to explore this and how this applies to your financial situation today. Real quick before doing so, highlighting the review of the week. This one comes from HT H reviews, five star review.

It says, great. Listen, this podcast is very helpful. It's a must listen. If you are thinking about retirement, it is spot on to the point and concise. Well, HT H reviews, thank you very much. Thank you very much to all of you who have left reviews. Fun to see more and more people watching the show, listening to the show every single week.

And appreciate all of you who have taken the time to leave your feedback and support the show. So with that, let's dive back into the episode. And I'm gonna use some examples here because I think this is actually a fairly simple concept when we flush it out. But it can be very difficult to decipher in practice in reality what is strategy verse, what is tactics?

And, and I don't mean this to be something philosophical. This is very, very practical to your financial plan, to everyone's financial plan, to the way that you use your money to get the most outta life. This is extremely important. So this is less of a, let's quote Peter Drucker and let's have some philosophical debates.

It's more about how can we understand the differences between strategies and tactics, and how can we apply that framework to our lives, not just to do better financially, but to use our finances to get the most out of life possible. So here's a classic example of someone that gets so focused on doing the right tactics.

That they lose sight of the bigger strategy. Someone might say to me, they say, James, I need to do Roth conversions and I need to do Roth conversions, because I've seen it all over YouTube. I've listened to it on podcasts. Everyone talks about it. I'm going to do Roth conversions and James, in order to most effectively do that, I'm gonna keep my income as low as possible so I have more room within the tax bracket I'm in to convert these funds.

Well, how do you keep your income low? They say, I'm not gonna draw as much money outta my traditional ira, so I'm gonna pull less out for basic living expenses. So there's more room to convert to my Roth. Because keeping your taxable income low is the best way to open up your ability to make a larger Roth conversion, which ultimately saves you lots of money in taxes.

So you might do that. And in terms of tactics, you may even execute it flawlessly. You may run the modeling software, you may run the projections and say, this conversion alone might save me a hundred thousand dollars in taxes over the course of retirement, just to use an example. But what are the implications of that?

Well, you're taking less money out of your ira, so assuming you don't have funds elsewhere, you're supplementing this with, you have less money to spend. Well, something has to give. Does that mean you avoid that vacation you wanted to take? Does that mean you avoid the the trip, the weekend trip with your spouse?

You know, something has to give. If you have less income, there's something that you can't do. So let's say you do this a few years in a row. Let's assume this series of Roth conversion saves you hundreds of thousands of dollars of the course of your life, and you're looking back on your life in your eighties and your nineties.

Let me ask you this question. Are you going to be thrilled that you have so much money in your tax-free Roth IRA that you won't ever have to pay taxes on again or. Are you gonna feel that pain of regret that you skipped those trips? You missed out on making those memories here with your family. And yes, you've got a lot more tax-free money, but that tax-free money does not offset the pain of realizing there's opportunity cost to what you could have done with family, with friends, with hobbies, with memories that could have been made along the way.

And granted, I recognize it as, I'm using that as an example. This is not by default, a mutually exclusive thing. Of course the goal is can you do all the wonderful things you wanna do along the way and have the most effective tax strategy or, and have the most effective investment strategy? Or, and you fill in the blank.

But what I am trying to say is, if you're just focused on the tactics, you're going to miss the bigger picture. Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal, or other financial advice.

It is for informational purposes only. Now, as you're listening, you may be saying, well, James, what should my strategy be? I thought my financial strategy was to minimize taxes or maximize returns or maximize income, or you fill in the blank. In a way, if you're looking at your portfolio and your finances as the be all, end all, then those are the goals.

But the way I choose to view things is how can our financial situation, how can our portfolio, how can our income, how can our financial situation be the tool that helps us accomplish, which is actually most important, which is how can we get the most out of life? So to me, put simply most people's strategy is how can I live a great life and don't run outta money?

Nothing about Roth conversions, nothing about asset allocation, nothing About which do you collect social security? Nothing about what's the best Medicare plan for you. Simply put, how can you live a great life and not run out of money? Obviously, everyone has their own unique life and their own unique goals, so there's gonna be some variation upon that.

This isn't to say this should be everyone's strategy, but I would say for the majority of people when they look at retirement, the goal is, I don't wanna run outta money and I want this to be a wonderful season of life. So that could be maybe an all-encompassing, very basic strategy. Now, once you have that, The tactics are a series of things you implement to best support that, to ensure that you can get the most outta life with your money, that you can do what you want to do while still ensuring you're not gonna run outta money.

So in this case, tactics would be what's your asset allocation? Are you doing Roth conversions? Do you have a charitable giving strategy? What is your social security strategy? All those things are done not just for the goal of doing them by themselves, but for the goal of supporting the bigger strategy to allow you to live a better life, to allow you to ensure you're not gonna run out of money.

And I know as I'm explaining this, many of you are probably saying, James, this is so basic. Why do you even feel the need to lay this out there? Well, I lay it out there because there's a ton of confusion. There's a ton of noise in finance to where it seems as if the goal is simply doing the thing itself.

So for example, Roth conversions. Oh, that's the goal. That's my financial strategy. And I'm picking on Roth conversions because many people, that's when their biggest concerns is taxes in retirement, and they think that because they're gonna pay taxes, that's an automatic. Reason to do a Roth conversion?

Well, to use another Peter Drucker quote, he says, there's nothing so useless as doing efficiently, that what should not be done at all. Again, there is nothing so useless as doing efficiently. That should not be done at all to me. You could absolutely relate this to Roth conversions. So if you're just doing a Roth conversion because you've heard me talk about it or another advisor talk about it, or a podcast talk about it, or your friend talk about it.

Take a look at episode number 1 59 just a couple episodes ago where I talk about reasons you shouldn't do a Roth conversion. Because I would actually take things one step further than what Peter Drucker said and saying there's nothing so useless as doing efficiently, that which should not be done at all.

There's nothing more harmful than doing something efficiently that should not be done at all. I don't care how effectively you implement that Roth conversion if it's not actually helping your bigger strategy. It's going to be harmful to your plan. So don't get so focused on the tactic. So many people wanna know, what fund should I own?

What portfolio should I have? What timing should I collect Social security on? What's the best Medicare plan? And these are all great questions. But they're asking them before there's a strategy in place, they're asking them before we know their full financial picture. They're asking them before they really even know what they want out of life or out of their future, out of their retirement.

And if you're starting with tactics, then you're putting the cart before the horse and it's not going to be effective. So to go back to my previous example of you seeing Youa, I'm not gonna travel this year because it means I'll take more out of my traditional IRA and then I can't do as much in conversions within my current tax bracket.

Well, that's a perfect example of you won the battle, but you lost the war. You perfectly executed the Roth conversion, but you missed the bigger picture. You executed the tactic flawlessly, but you missed the entire strategy. What I do want to distinguish though, Is sometimes this is necessary, and this can be one of the hard parts.

This is one of the nuances to all of this. Occasionally, you may need to do something to remain on track to accomplish a strategy. A perfect example of this is you may need to reduce spending temporarily to ensure your portfolio remains intact. So there's a big difference between these two examples. The first is, Hey, I'm gonna reduce my IRA spending because I wanna maximize Roth conversions.

What you're doing that purely to have more tax-free money at the end of your life? But is that a trade off you're willing to accept to miss out on Wonderful opportunities along the way? Versus, let's say you temporarily take less money out of your portfolio, let's say that same ira, but it's because inflation's very high.

The market's down, you're spending's starting to creep up too much, and you say, you know what? I need to temporarily reduce spending to ensure my portfolio remains intact for my seventies, eighties, nineties, and beyond. So those are two very different things in the former example. You're doing something that, maybe this isn't the perfect way of saying it, but you're prioritizing your financial wellbeing over your personal wellbeing.

You're doing things that looks at your portfolio as the goal, not a life well lived as the goal. In the latter example, you're making a similar change, but you're doing it so you can continue your wellbeing later on in retirement. You're doing it so that life well lived can continue not just today, but well into your retirement years.

So you're still prioritizing a life well lived. You're still prioritizing getting the most outta life with your money. But you're making an adjustment today that's necessary that will allow you to continue doing that for the years to come, and you're not letting the tail wag the dog. What you're doing is you're keeping the dog alive so it can continue wagging its tail for the rest of your retirement.

So as you're looking at these things, and now there's some nuances here. But make sure that you're prioritizing strategy and the tactics. They're just, well, the tactical things that you're doing to ensure that that strategy is always in focus and that you're always moving in that direction. So today is a fairly brief episode.

Today is not even necessarily a fairly technical episode. It's all about how do we properly view planning? In what context do we view our portfolio or tax strategy or income strategies? Well, it's in the context of supporting the bigger strategy. So perfect planning is when great strategy is met with well executed tactics, but we should never confuse the tactics themselves as being the strategy.

So that is it for today's episode. I appreciate as always, those of you who listened and support the show. Thank you for doing so. If you want more great content, check us out on YouTube under Route Financial, where we have these podcasts, as well as other material to make sure you're getting the most outta life with your money.

Thank you for listening to another episode of the Ready for Retirement podcast. If you're enjoying the show, please subscribe and let me know by leaving a five star review. And as always, for list of the notes and the resources mentioned in today's episode, you can find those at the Ready for Retirement website, which is ready for retirement.co.

That's ready for retirement.co. And if you have a question that you would like for me to answer on a future episode, then you can also go to the Ready for Retirement website ready for retirement.co. And there's a page called Submit Your Question where you can submit a question for me to answer in a future episode.

Thanks as always for listening, and I'll see you next time.