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If I Could Only Teach 3 Financial Lessons Thumbnail

If I Could Only Teach 3 Financial Lessons

By Angela Dorsey

Let’s face it. Managing your personal finances can sometimes feel overwhelming. There’s a seemingly never-ending stream of information (and occasionally misinformation!) across the entire spectrum of financial lessons to learn.

But what if you could reduce that spectrum to its most basic components and only focus on ideas that support a stable financial future?

In this article, I want to cut through the noise and concentrate on the three most important financial lessons I want everyone to know. Regardless of your age or income level, these are practical tips that can help significantly improve your financial well-being.

1. Ignore Media Hype 

Financial media can be a useful resource for information and gathering insight. However, it’s so important to understand that the constant onslaught of comments and news can be exhausting and lead to impulsive decisions. 

As you’re reading financial media, remember that it thrives on sensational headlines and short-term fluctuations. When you get caught up in the daily ups and downs, it’s easy to make irrational decisions based on emotions. For example, when markets dip, you could be tempted to sell and miss out on potential recovery opportunities. 

Instead, focus on the long-term fundamentals that drive thriving investments. By filtering out the media hype and following a well-researched plan, you can make informed investment decisions and progress toward your financial goals.

2. Understand the Sequence of Returns 

Another key financial literacy element I’ve seen grow in importance over the years is understanding the sequence of returns. 

Put simply, sequence of returns is the order in which investment returns occur throughout your retirement. It might not be a well-known concept, but it can significantly impact how long your retirement savings last. 

Early retirees are especially susceptible to negative sequences of returns. Here’s why. Let’s say there’s a major market decline right after you retire. If that happens, your portfolio might shrink, and you’ll be forced to withdraw your monthly retirement allowance from a depleted portfolio, further reducing your nest egg. 

This scenario could create an ongoing negative cycle where you have less money to invest in future market gains. That means that long-term, your nest egg could run out sooner than you’d hoped.

But by understanding how the sequence of returns could affect your portfolio in the first place, you can create strategies to mitigate future risks. For example, you could hold on to a buffer of cash or bonds to cover withdrawals during market downturns, so you don’t have to deplete your nest egg while the market is down. This is just one strategy for optimizing sequences of returns.

3. Learn About Various Retirement Funds and Withdrawal Strategies

This is the final financial lesson I want to explain today. 

When planning your retirement finances, it’s critical to fully understand all the different retirement funds available. Traditional IRAs and 401(k)s have limitations on when you can access the money without incurring penalties, but they also offer tax advantages on contributions and growth.

Tax-free withdrawals are possible from Roth IRAs and Roth 401(k)s upon retirement, but contributions to these accounts are normally made with after-tax money. Your projected future income and current tax bracket is what determines which accounts are best for you.

Then once you’ve accumulated your nest egg, knowing the most effective ways to tap into the funds is paramount. This is where withdrawal strategies become all-important. The well-known 4% rule says you should take out 4% of the value of your portfolio annually and adjust for inflation. 

Other withdrawal strategies like the bucket system or dynamic withdrawals could provide greater flexibility. By dividing your savings into time-based portions, the bucket technique provides easy access to short-term needs while safeguarding long-term growth. With dynamic withdrawals, your principle is preserved by adjusting the amount you remove in response to changes in the market. 

The bottom line is that your complete financial picture, spending requirements, and risk tolerance all play a role in selecting the withdrawal plan that’s best for your situation.

Reach Out Today!

Our team’s mission at Dorsey Wealth Management is to assist women of all ages in pursuing their financial goals. 

Whether you’re an existing or prospective client, we provide a personalized approach that thoroughly prepares you for all stages of life’s financial twists and turns. 

Get in touch by scheduling a free introductory 30-minute phone call. Or you can reach us at (310) 370-7776 or angela@dorseywealth.com.

About Angela

Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.