Preserving and Transitioning Your Wealth – Most Common Wealth Planning Concerns and Strategies

When we meet with clients, we are often asked about what type of wealth planning other families like theirs are doing.  This can be a challenging question since everyone’s financial situation is different but because most of our clients have obtained or are nearing financial independence, their primary goals are often similar, which is maintaining their financial independence.  Being financially independent is having enough wealth and financial resources that one does not need a paycheck or wage to meet their financial obligations and to live their chosen lifestyle (as measured by their lifestyle expenses). That if one continues to work it is because they want to, not because they must.  Most often financial independence is thought of in terms of having enough wealth to be able to live comfortably throughout one’s retirement. The tips shared in this ongoing series are the most common issues of concern for our clients regarding wealth preservation and transition. 

Generally, our clients’ goals are focused on first maintaining this independence (which includes maintaining their spending power by having their portfolio growth outpace inflation), and secondly, to transition that wealth by leaving their wealth to loved ones (and hopefully provide their family a level of financial security/independence). That is why the planning strategies we discuss with them often center around the themes of preserving and protecting their wealth (which have taken some of them a lifetime to build) that provides their financial independence. Besides being concerned about investment growth, our clients are often concerned about the impact of taxes (both income and estate) on their ability to preserve and transition their wealth, and therefore, discussions often are about strategies that can help minimize taxes.

Benefit of a Cash Flow Analysis: Am I Financially Independent? Will I Run Out of Money?  

Although many of our clients have saved substantial amounts that should equate to financial independence, many of those clients are still worried about running out of money during their retirement.  This can be due to personal experience with past economic difficulties, like the Great Recession of 2008, but for many of our clients this concern stems from their difficulty in defining what financial independence is or what they would need to do to achieve it.  Since the main factor in determining financial independence is one’s annual expense need, the amount needed to be saved varies from family to family.

There are rules of thumbs that can help provide a rough estimate as to the amount needed to be saved for retirement. For example, there is the "25 times rule," which defines the amount that needs to be saved as being 25 times a person's net expense need. For example, if someone has a net annual expense need (after subtracting out income sources like social security and rental income) of $80,000, based on this rule of thumb that person would need to have $2 million dollars ($80,000 times 25) in savings. Although these rules of thumb can help provide some savings guidelines, they are not the most effective ways of determining financial independence because they do not take into consideration a client’s complete financial situation, including the impact of taxes especially if they live in high income tax states like California or Hawaii. The most effective way for us to help our clients determine financial independence and help provide peace of mind is by creating a personalized cash flow analysis.

A Cash Flow Analysis, is a year-by-year cash flow report until life expectancy that reflects a person’s cash inflows and outflows, taking into consideration the amount of liquid assets they have saved and how those funds are invested.

Cash inflows represent cash or income which is flowing in and includes the following:

• Wages (if any)
• Social Security retirement benefits
• Annual Pension Income
• Rental real estate income
• Interest from savings accounts
• Dividends from investments
• Capital gains from the sale of financial securities like stocks and bonds
• Other proceeds from a sale of a capital asset (like a home)

Cash outflows represents a person’s expenses (funds that are flowing out) which is needed to meet one’s financial obligation and lifestyle needs, and includes the following:

• Rent or mortgage payments
• Property Taxes
• Income Taxes (both State, if any, and Federal)
• Rental property expenses (including depreciation and maintenance expenses)
• Utility bills
• Groceries
• Entertainment (books, movie tickets, restaurant meals, etc.)
• Travel/Vacations

One of the most difficult exercises for our clients in creating a cash flow analysis, which is also one of the most important ones, is to determine what their expenses are.  We can help by providing worksheets that breakdown expenses or we can estimate expenses by looking at amounts withdrawn from accounts or credit card bills, but the need for a fairly accurate expense number is extremely important for the cash flow analysis to be accurate and meaningful.   We have often heard of athletes or lottery winners who unfortunately quickly spend what they earn. This reflects the importance, regardless of how much you have saved or earned, of controlling spending and that is why cash flow analysis can be such a valuable tool.

As mentioned, financial independence is defined by the ability to maintain a chosen lifestyle and financial obligations without earning a wage or paycheck. Without a consistent paycheck, a client will often have a negative net cash outflow (cash outflow exceeds cash inflows). In this situation, it is likely a client will need to make withdrawals from savings or portfolio accounts to meet their financial needs.  The most optimal result is that their investment portfolio growth is close to or exceeds the amount of negative net cash flow. By running a year-by-year cash flow analysis and applying reasonable growth rate assumptions to a portfolio, we can see if there is enough saved to meet those needs throughout retirement. A cash flow analysis also allows us to model out the impact of other expenses, such as children’s college costs, possible wedding costs, and other desired goals like supporting the medical needs or long-term care needs of parents.

Our goal is to help our clients preserve, protect, and transition their wealth.  What was mentioned in this article is one of the many ways that we can help clients with their wealth planning to help them achieve this goal. If you are interested in exploring these strategies or if you have any other wealth planning issues or questions, please let your Relationship Manager know and they can set up a meeting with the Wealth Planning team.  Or read more insights on life and wealth planning from our team here.