Every six months, S&P Dow Jones Indices produces its SPIVA scorecard, which compares the performance of actively managed mutual funds to their benchmarks.
“Whether you look at the past three, five, 10 or 15 years, only about 15% of all professional mutual fund managers were able to beat the market,” says David Hegarty, founder and CEO of Playbook, a step-by-step app that helps people increase their future net worth at retirement.
“It is very, very hard to beat the market,” he says. “Less than one in six professional investors do so — people who are trained, paid and spend their careers looking for the best investment opportunities.”
Hegarty suggests that maximizing your tax strategy is a much more effective approach.
Maximizing the amount of money in tax-advantaged investments provides an instant bump of up to 11.7% ROI (assuming you are in the higher tax bracket).¹
“It would be near impossible to find any other investment opportunities that give you a guaranteed 11.7% bump,” Hegarty says.
In fact, following this strategy of maximizing tax advantages across all of your accounts could boost your overall net worth by around $1.3 million.²
Which strategy nets the best returns?
Say you’re 30 years old and have $2,000 to invest each month. You could:
- Always pick the best day to invest your $2,000 each month.
- Invest like Warren Buffett, getting the same great returns.
- Use all the tax breaks you can to save money.
If you consider a baseline scenario of investing in the market through dollar cost averaging into VTI each month — which historically yields a 9.85% in after-tax returns — here’s what you could expect:
- Perfect market timing increases this to a 10.1% return after taxes — a slight uptick but not ground-breaking. Plus, this assumes you’d always pick the perfect day to invest.
- Emulating Warren Buffett’s investment acumen boosts your after-tax returns slightly higher to 10.3%, showcasing the value of expert investment strategies.
- By strategically contributing to your 401(k) and IRA, you elevate your return to an impressive 11% after taxes.
Comparing these three scenarios, maximizing your tax advantages is the real game-changer.
Why tax optimization be tricky on your own
According to Playbook, there are three main issues that people run into: understanding their tax-advantaged options, maximizing those tax advantages annually and remaining consistent over time.
Many people are unaware of the various tax-advantaged accounts available – or that they can contribute to both a 401(k) and an IRA in the same year. But understanding your tax advantages is one thing; maximizing them each year is another.
Unfortunately, if you don’t use those benefits, you’ll lose them at the end of the year. This ticking clock underscores why it’s important to start maximizing your tax advantages as soon as possible: because once the opportunity to optimize your taxes is gone for that year, there’s no getting it back.
Another challenge is consistency. Even the best plan loses its effectiveness if it’s not consistently followed.
A service like Playbook offers a combination of robo-advisor and real-person expertise to create a tax-efficient financial plan and overcome these challenges — even if you’re not starting out with hundreds of thousands in assets.
You can see the difference that this kind of tax-advantaged planning can make with the help of Playbook’s financial freedom timeline. It can project your future net worth based on your current savings and strategy and even make suggestions on how you can accelerate your path to financial freedom.
“Starting with Playbook when you don’t have a lot of assets is actually great,” says Hegarty. “It means we can make sure every new dollar you save is optimized for taxes from the start. Fixing things later is harder than doing it right from the beginning.”
The Playbook advantage
Playbook’s tailored tax strategy factors in your income, marital status and other relevant data to determine which accounts you’re eligible for, the contribution limits, the optimal sequence for funding these accounts and whether advanced strategies, like a backdoor Roth IRA, are necessary.
After calculating your optimal tax strategy, Playbook then crafts a comprehensive financial plan that aligns with both your short-term and long-term goals, such as buying a house, planning a wedding or saving for retirement.
“This approach ensures you’re funneling as much money as possible into tax-advantaged accounts while still achieving your personal milestones in the shortest timeline,” says Hegarty.
“We also guide you through the basics of investing and how to build a portfolio that syncs with your financial plan.”
Playbook helps you stick to your plan by automating monthly transfers. Upon receiving your paycheck, funds are seamlessly allocated to the most beneficial accounts for maximizing your future net worth. This plan is adaptive, adjusting to changes in your savings rate, income and even tax laws.
Uncovering hidden opportunities
Aside from tackling known challenges, Playbook can help uncover hidden opportunities for advanced tax-smart strategies. Some of these include:
Tax-smart location: Putting investments like dividend stocks and REITs in tax-efficient spots could lower your taxes and boost your returns.
Tax loss harvesting: Finding and using investment losses to lower your taxable income.
Smart rebalancing: Rebalancing your entire portfolio in a way that avoids extra taxes.
Playbook is so sure of its methods, that it promises to generate a 2x ROI on its subscription fee for clients subscribed to their premium PLaybook Plus tier who deposit $49k into Playbook investment accounts.
“We make sure you know why our advice is good for you, breaking down tricky financial concepts into something you can easily understand,” he says.
“This way, you make choices with confidence, knowing exactly why they’re right for you.”
¹ For full analysis and assumptions on which investment strategy yields the highest after-tax returns, see https://www.helloplaybook.com/learn/genie
² Estimated net worth boost based on specific tax advantage maximization strategies. See helloplaybook.com/net-worth for methodology and assumptions.
Wise Publishing, Inc. was paid a flat fee for producing this review of Playbook and is also paid a flat fee for each successful referral to Herring RIA Sub, LLC ("Playbook") made through our links. Wise Publishing, Inc. is not a Playbook client. There is no guarantee that clients will have similar experiences or success.
