At Incline Financial Planning, we believe a great investment strategy should be both smart and simple. Our philosophy is built on a few core principles that guide every decision we make on your behalf. We don't just build a portfolio; we build a plan designed to give you peace of mind.
The Foundation: A Dynamic Strategy Built for Retirement Income
When you transition from saving to spending, your investment portfolio must evolve from a growth engine into a reliable source of income. This is the ultimate goal, and it's where our strategic and organized approach, known as the Bucket Strategy, provides clarity and confidence.
Think of your portfolio as having three distinct buckets, each serving a specific purpose in your retirement income plan:
Bucket 1: The Short-Term Bucket (1 year): This is your financial safety net, designed to cover all of your income needs for the next 12 months, along with any emergency funds. Given the short-term nature of these funds, this bucket is held in cash or cash equivalents, ensuring you never have to sell a long-term asset during a market downturn to pay for your day-to-day needs.
Bucket 2: The Mid-Term Bucket (Years 2-10): This bucket is designed to provide income for the intermediate term. We work with you to determine a timeframe that aligns with your personal risk tolerance. A shorter timeframe (Years 2-6) is generally suitable for those with a higher risk tolerance, as it allows more of your overall portfolio to be invested for long-term growth in Bucket Three. A longer timeframe (Years 2-10) is a more conservative approach, as it secures more years of income in relatively stable assets, insulating a larger portion of your funds from short-term market volatility. This lump sum is carefully calculated to account for inflation and is invested in conservative assets like bonds or other fixed-income instruments. This bucket acts as a buffer, insulating a significant portion of your funds from short-term market volatility and giving your long-term investments time to grow without pressure.
Bucket 3: The Long-Term Bucket (10+ years): This is your long-term growth engine. The assets in this bucket are focused on capital appreciation and are designed to outpace inflation over the long haul. It consists of a globally diversified portfolio of stocks and other growth-oriented assets. The primary aim of this bucket is to grow your capital so that it can replenish the other buckets over the long run.
A Disciplined, Dynamic Approach
The true power of this strategy lies in its dynamic implementation and annual review. At the beginning of each year, we look forward to the income needs required from the portfolio and reallocate assets based on the Net Present Value (NPV) of those needs.
Here's how we apply this financial principle:
Fund the Short-Term Bucket: We fund your "Now" bucket by transferring assets from the mid-term bucket, ensuring you have cash on hand for the coming year.
Replenish the Mid-Term Bucket: We calculate the NPV of your future income needs. This involves determining the lump sum required today to cover the income needed for the next 5-8 years, accounting for the time value of money and using the current yield from our bond portfolio as the discount rate. We then harvest gains from the long-term growth bucket to replenish the mid-term bucket to this target NPV, restoring it to its target duration.
This annual process ensures your overall asset allocation stays aligned with your risk tolerance and retirement goals. By employing the Bucket Strategy, we provide you with the psychological fortitude to withstand market volatility, knowing that your near- and mid-term income needs are secure, while your remaining funds are invested for long-term growth.
Choosing the Right Investments: Our Portfolio Philosophy
Once we determine how much needs to be in each bucket, we choose the specific investments to fill them. Our choices reflect a disciplined, research-driven philosophy focused on diversification, cost-efficiency, and strategic asset allocation. We believe in keeping costs to a minimum so that more of your money can grow over time. For this reason, we primarily use indexed Exchange-Traded Funds (ETFs) with very low costs from leading providers like Vanguard, BlackRock's iShares, and State Street's SPDR.
Our Stock Portfolio: A Global Approach with a U.S. Tilt
We believe diversification is your shield. By investing globally, we aim to capture a wide range of market returns while reducing the risk of being overly exposed to any single region. To achieve this, our portfolio includes a market-weight position in U.S. and international stocks, with a slight tilt toward U.S. assets to help mitigate currency risks. We also incorporate a dedicated real estate component to round out a fully diversified equity portfolio.
Our Equity Allocation:
U.S. Stocks (70%): We gain broad exposure to the U.S. market through a mix of large-cap, mid-cap, and small-cap stocks.
International Stocks (25%): We believe in a mix of both developed and emerging markets to achieve a true market-weight position.
Global Real Estate (5%): We add this to our equity mix to further enhance diversification.
Our Bond Portfolio: Strategic, Short- to Intermediate-Term Focus
The purpose of our bond portfolio is to provide stability and enhance returns while limiting risk. We are a bit more tactical with our bond allocation based on the current yield curve. We limit risk by focusing on the short- to intermediate-term side of the yield curve, which tends to be less sensitive to interest rate changes.
Our Fixed-Income Allocation:
We use a blend of corporate bonds and government securities. We tilt towards investment-grade corporate bonds to enhance returns, as they typically offer a higher yield than government bonds.
Global Diversification: We believe in buying bonds across the globe but limit those purchases to developed nations to provide a diversified mix while managing risk.
Inflation Protection: We strategically include inflation-protected bonds to safeguard your purchasing power.
The Final Piece of the Puzzle: Tax-Aware Investing
Once we've determined the optimal allocation of stocks, bonds, and cash, the final and most crucial step is to place these investments in the right accounts. It's not just about what you make, but what you keep after taxes. We take your personal tax situation into account to ensure your investments are receiving the most favorable tax treatment.
Each of your accounts—taxable, tax-deferred, and tax-free—has unique tax characteristics. We follow a strategic "asset location" approach to maximize your after-tax returns.
Location Matters: We strategically place assets in the accounts where they are most tax-efficient. Bonds, for example, which generate income taxed at your ordinary income rate, are generally better placed in tax-advantaged accounts (such as a Traditional IRA or 401k) to shield that income from annual taxation. Conversely, tax-efficient investments like low-turnover index funds, which generate lower taxable events, are more suitable for taxable brokerage accounts.
Tax-Efficient Withdrawals: We also consider the long-term plan for withdrawals. Knowing that funds from your Roth accounts are tax-free, we typically use those for "last resort withdrawals," allowing those assets to compound and grow for as long as possible. We prioritize withdrawing from taxable accounts first to utilize lower capital gains rates, followed by tax-deferred accounts. This disciplined sequence of withdrawals is designed to minimize your lifetime tax liability.
This tax-aware approach to portfolio management is a cornerstone of our service. By tailoring investment allocation and holdings to each account type, we can further enhance your overall tax efficiency and long-term financial success.
Our Commitment to Personalized Planning
Every client's situation and goal is different, which is what puts the "personal" in personal finance. Our entire investment portfolio building process starts with a financial plan. Knowing your goals and future income needs allows us to build a tax-efficient portfolio designed uniquely for you.