A Good Financial Strategy Isn’t Always Worth Pursuing
One lesson that becomes easier to appreciate with experience is that a financial strategy can be technically sound and still not be worth pursuing.
Affluent families are often presented with sophisticated ideas that promise lower taxes, greater estate efficiency, improved asset protection, or some other financial benefit. Roth conversions, trusts, charitable strategies, family entities, insurance arrangements, and tax elections can all have a legitimate place in a financial plan.
But “Does this strategy work?” is only the first question.
A better one is, “Will it improve my situation enough to justify everything that comes with it?”
That is where return on effort becomes useful.
Think Beyond the Potential Savings
Return on effort is not a precise financial calculation. It is a way to judge whether the likely benefit of a planning strategy is meaningful enough relative to the work, cost, complexity, and restrictions required to implement it.
That distinction matters because a projected benefit can look compelling in isolation.
A strategy might be expected to save a family $200,000 in taxes over time. That sounds meaningful, and it may be. But the analysis changes if achieving that result requires substantial legal and accounting work, ongoing administration, reduced access to assets, or assumptions that may not hold.
In practice, planning ideas that look very attractive when the potential savings are first calculated can become less appealing once the full process is laid out. The individual may have liked the projected benefit but not the added complexity, the loss of flexibility, or the amount of attention the strategy would require year after year.
For another family, those same trade-offs may be completely reasonable because the expected benefit is much larger or because the strategy addresses something they care deeply about, such as estate tax exposure, charitable intent, or control over how wealth passes to future generations.
The value is not determined only by what a spreadsheet says could be saved.
Some costs are obvious: attorney fees, tax preparation costs, insurance premiums, trustee fees, or other expenses. Others show up later in the form of extra tax returns, valuations, recordkeeping, changes in asset ownership, or the need to coordinate among several professionals.
That does not make complexity bad. It just means complexity should earn its place.
What Has to Go Right?
Another important question is how much has to go right for the strategy to produce the expected result.
Does it depend on future tax rates? Investment performance? Longevity? The size of a future estate? How long someone holds an asset? Whether the law remains unchanged?
The more dependent the strategy is on uncertain assumptions, the more useful it becomes to test what happens if reality turns out differently.
A Roth conversion is a simple example. The calculation may show a long-term tax benefit under one set of assumptions. But the result can change depending on future tax brackets, investment returns, the source of the tax payment, Medicare premiums, charitable intentions, or how long the converted assets remain invested.
The point is not to avoid strategies that involve uncertainty. Nearly every long-term planning decision does. The question is whether the opportunity still looks worthwhile across a reasonable range of outcomes.
Materiality matters too.
Saving a few hundred dollars may be worthwhile when implementation is easy. The same savings become much less interesting if they require hours of annual administration or impose meaningful restrictions. A larger opportunity may justify far more effort.
This is one area where good financial planning should help narrow the field. Most people do not need more ideas. They need help deciding which ideas actually deserve their time and attention.
Some Opportunities Are Better Left Alone
There can be a tendency to equate more planning with better planning. In practice, pursuing every available optimization can make a financial life unnecessarily complicated.
Sometimes the best outcome comes from a sophisticated strategy. Other times, a simpler solution gets most of the benefit without creating nearly as much work. There are also opportunities that are perfectly valid on paper but do not fit the person well enough to be worth pursuing.
Recognizing that is part of the planning process.
A financial plan should not become a collection of strategies simply because each one can be justified individually. The pieces still need to fit an individual’s goals, preferences, willingness to accept complexity, and broader financial life.
If you are considering a new strategy, ask your advisor to help quantify more than the potential upside. Look at the cost, time horizon, assumptions, ongoing responsibilities, and flexibility you may give up along the way.
A Savant advisor can help you evaluate those trade-offs in the context of your broader financial plan and determine whether an opportunity may be appropriate for your goals, circumstances, and preferences.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Edward R. Jastrem
Senior Planning Specialist
CFP®, ChFC®, CMFS, CLTC®, CRPC®, AWMA®, MS