Do you remember the last time you purchased an automobile? I went through this process last year so it is fresh on my mind. Before your purchase you likely spent significant time deciding on the various automotive features that were important to you. You probably considered styling, color, comfort, drivability and even a host of technology features or gadgets. Fuel economy, on-going maintenance costs, safety ratings and resell value were probably some of your objectives as well. Purchase price would likely have been high on your list as well as the existence of a manufactured extended warranty.
With the final criteria in hand you are now ready to shop. You visit various online Internet sites or travel down to the local auto dealership to look at potential vehicles. With your pre-determined objectives in mind, you begin the time consuming process of sifting through available vehicles to find that perfect car which matches your wish list. In reality, your wish list becomes your buying glasses. With this perspective an effective decision can be made.
Without this mindset consumers can often fall prey to unscrupulous sales tactics or end up purchasing features they do not need or want. Many have experienced the pangs of buyer’s remorse, when one realizes a particular decision was incongruent from his or her original objectives.
This auto buying process can be a helpful pattern or guide in our efforts to protect and grow wealth. Dozens of decisions must be made to strategically chart one’s financial course. As we develop key financial strategies to combat various financial risks in our lives, consider my four wealth objectives as a recommended framework for sound decision-making.
First, be purpose driven. To help stay on purpose, ask the question, “What is the money for?” If we can’t identify the asset’s purpose then we can’t position the asset to meet that aim. Often times, one asset needs to work in concert with another asset to provide a desired outcome. Like a beautiful concert choir, all the parts must come together to produce one great whole. If we don’t know what the money is for, how can we create meaningful strategies and outcomes to meet our goals?
Second, maximize enjoyment. Each of us has the right to enjoy our wealth. If you have to ask for permission or pay a penalty, it’s not your money! Some financial instruments can provide barriers to access. CD’s and even some structured annuities, improperly positioned, could fall into this category. Another class could be equities held in fear of triggering a taxable gain. Living off one’s assets can be another barrier to enjoyment, but what if assets could be spent down in retirement and then replaced to heirs at passing? Wouldn’t this provide more enjoyment?
Third, mitigate risk under most circumstances. Does the designed strategy mitigate the desired risk or threat? What about inflation risk, market risk, withdrawal rate risk, sequencing of returns risk, survivorship risk, long-term care risk, longevity risk or even legacy risk? Each of these risks can be significant and must be addressed.
The strategy pursued must work under most circumstances. Simply put, if we have increased market volatility, will your plan work? If we experience aggressive inflation will your plan work? If you have a long-term care event, will your plan work? What about when one spouse passes? Retirement is not a time for economic surprises! Building failure into the plan is not an option.
The fourth objective is intelligent asset transfer or what I call “pass it on.” Our assets are going to pass on at death, but to whom, and will they transfer in an intelligent manner? Our assets can pass to the government, large corporations, financial institutions, other people in the form of estate sales, to a charity or to your family.
Expectedly, most seniors want their assets to go to family members and yet, without effective planning this may not occur. Remember, depending on the asset type, assets pass to the next generation differently. Whether it’s a brokerage account, annuity, life insurance or real estate, each transfers and is taxed differently to the next generation, meaning the net result to heirs can vary. This is more complicated when pre-tax plans like IRA’s exist. A living trust should be considered in all of these circumstances.
These are my four wealth objectives. When evaluating a certain financial strategy, I encourage my clients to ask themselves the following questions. “What is the money for?” “Do I have the right to enjoy my wealth?” “Will this strategy work under most circumstances and how will the asset pass to the next generation?”
Just like pre-determined objectives in a simple car buying decision, I have found these questions and their related objectives most helpful in guiding one’s financial decisions. Developing effective financial strategies is essential to enjoying one’s golden years. Maximize your enjoyment by applying the aforementioned protection and wealth building objectives. They will help you stay on the road to financial peace.