3 Strategies to Increase the Value of Your Estate

Managing investments in retirement can be difficult, so while many people choose to manage their own savings, others decide it might be more prudent and less stressful to hire a financial professional.

You can't blame them. People want to enjoy their lives, not spend what should be precious free time analyzing investments and wondering what move to make next – or whether to make a move at all.

But if you're going to hire a financial professional to manage your money, it's important to understand just what kind of value he or she can provide for your financial future.

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I like to say that it's important to know whether your adviser is a portfolio manager or a financial planner.

To understand what I mean, let's examine a hypothetical case of a couple we'll call Mark and Ann, who are both 60 years old and plan to retire at age 66. They hope to maintain their current lifestyle throughout their lives and have assets left over to leave to their three children.

Mark and Ann have planned well for their retirement with a combined $1.05 million in investable assets. Specifically, they have $350,000 in Mark's individual retirement account, $300,000 in Ann's IRA, $200,000 in a brokerage account, $100,000 in Mark's Roth IRA and $100,000 in a CD and money-market account.

Meanwhile, the couple's combined annual income is $120,000. In retirement, they estimate the need for $85,000 annually, taking into consideration an inflation rate of 3%. Their annual after-tax Social Security income is $46,580, meaning they'll need to withdraw $38,420 from savings to reach their $85,000 target.

If they manage their investments themselves, Mark and Ann might enjoy an average increase of 5% year, giving them $4.9 million in required cash flow and $1.2 million to transfer to their children.

But let's say they decided to hire a financial professional. Let's assume that this adviser, after fees, succeeds in increasing the portfolio returns by another 0.5% annually. The cash flow remains the same, but assets to their heirs would increase to $1.9 million, a jump of $727,635.

Lucky heirs!

Sounds good, doesn't it? The obvious conclusion would be that hiring a financial adviser was well worth it.

Unfortunately, a lot of financial advisers stop right there and miss out on potential planning strategies that could have improved the financial outlook for their clients and their families even more.

That's where the question of whether your adviser is a "portfolio manager" or a "financial planner" comes into play.

Let's take a look at a few of the strategies that could provide Mark and Ann, and ultimately their heirs, with an even greater return on investment.

Changing the Order of Withdrawals

Let's say Mark and Ann's savings are spread out among an IRA, a brokerage account, a Roth IRA, a CD and a money-market account, and they decide to withdraw money from the accounts in that order.

The results are the examples I illustrated above.

But let's say Mark and Ann reverse that order, withdrawing money first from the money-market account and the CD, which would be the accounts with the lowest return on investment. Their cash flow would remain the same, but the assets left to the heirs would grow by an additional $606,363 to $2.5 million.

That's a huge chunk of cash in return for a simple change in strategy.

Roth IRA Conversion

Another tactic worth considering would be to convert their traditional IRAs to a Roth IRA. That would come with several potential benefits, including more favorable tax implications for the surviving spouse and heirs.

Let's say our good friends Mark and Ann both convert their entire IRA balances to Roth IRAs over the course of 10 years and pay the tax on the conversion from the other assets available as a cash flow.

Guess what would happen in this scenario. The wealth for their heirs would increase by another $1.2 million, now bringing the total to $3.7 million.

Cash Value Life Insurance

Here's an additional proposal we could make to Mark and Ann. What if Mark were to buy a cash-value life insurance policy and pay a premium of $35,000 a year for seven years?

Mark and Ann's heirs would benefit more than ever. Because of the life insurance policy, the potential benefit has grown another $892,526, for a new total hovering in the $4.6 million range.

So let's review. Initially, the wealth going to the heirs was $1.2 million when Mark and Ann took the do-it-yourself approach. That increased to $1.9 million when they enlisted the help of a professional to manage their portfolio. But it catapulted to a whopping $4.6 million when good planning strategies came into play.

While the ability of your financial adviser to increase the returns in your portfolio is unknown, the potential value of good planning is obvious. That's why you want to make sure your financial adviser is not only a portfolio manager, but also a good financial planner.

Daniel Shub is the founder of OCTO Capital and Shub & Company. He holds the Registered Financial Consultant ® designation, has passed the Series 65 securities exam and is insurance licensed.

Rozel Swain contributed to this article.