We continue to watch our elected officials wrestle over the financial well being of our nation. No matter their rhetoric, we wake up realizing that our country is still $16 trillion in debt and annual deficits are projected to continue, not to mention the need to increase the debt ceiling before year’s end. Social Security and Medicare are still slated for bankruptcy, the housing market remains in shambles, unemployment continues to rage and we still have no coherent energy policy. Did I forget to mention that the Federal Reserve is still doubling down on QE3 by printing even more money, $85 billion a month?
These national problems are serious and erode the value of our estates. As we sort out the right course, may I offer some principled framework to help navigate this financial storm? I call these my four wealth objectives. To put this in context, remember the last time you purchased a car? Prior to purchase you likely spent the necessary time deciding on the various automotive features and objectives that were important to you. You then used these pre-determined objectives to guide your decision. The same simple process can be applied as you protect and grow your wealth.
My four wealth objectives are a recommended framework for guiding your financial thinking. First, be efficient and effective, not necessarily based on risk. So many times our financial decisions are not efficient or effective. This can be true when making decisions regarding the deductibles on an auto insurance policy or buying financial products that are inflexible or laden with hidden fees or costs. Given present inflation, rates on an average money market account or CD today are certainly inefficient. Unnecessary taxes both while we are alive and those assessed on our heirs after our passing also fall into this category. Risk is another factor. If we could get to our destination with substantially less risk, wouldn’t that be better?
The second objective is the right to enjoy your wealth. If you have to ask for permission or pay a penalty, it’s not your money! What about having money tied up in instruments that you can’t get to like CD’s or even certain annuities? Liquidity is important, so forging a strategy that provides both growth and liquidity is superior. Living off your assets can be another barrier to enjoyment, but what if assets could be spent down in retirement and then replaced at passing? Being able to provide to your heirs what you want but retaining the pleasure of the assets while you are alive can be designed. Wouldn’t this provide more enjoyment?
The third objective is what I call “pass it on” or an intelligent transfer of your wealth. 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 their family and yet without effective planning this may not occur. I have a present client that if advanced planning is not performed, estate taxes will demand a significant portion of her assets at her passing. But remember, assets depending on their class, pass to the next generation differently. Whether it’s a stock, bond, mutual fund, annuity, life insurance or real estate, each transfers and is taxed differently to the next generation, meaning the net result to your heirs varies.
Finally, the strategy you are pursuing 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.
These are my four wealth objectives. When evaluating a certain financial decision, I encourage my clients to ask themselves, “Is it efficient and effective? Do I have the right to enjoy my wealth? How will it pass on? And will this strategy work under most circumstances?” I have found these objectives most helpful in guiding your financial decision making process.