It takes a period of time to understand someone’s financial life. Even more focus is required to identify the risks they face and then develop effective risk-mitigating strategies putting them on the path to reaching their goals. In the end, worry is abated and an increased sense of financial peace ensues.
As to process, my common financial chessboard analogy often proves helpful. I am not a big chess player, but everyone knows that the game of chess is played with a variety of pieces, each having different capabilities and inherent characteristics. When you move one piece on the board, the whole board changes! Since chess is a game of strategy, a good player often considers his or her second, third and forth moves simultaneously, rather than each move being an isolated, independent event. The same should be true in our financial lives.
As a person’s individual financial chessboard becomes clear, I often find a variety of financial instruments like real estate, stocks, bonds, mutual funds, annuities, IRA’s, CD’s, savings and checking accounts. Other protection pieces like Medicare, auto, home and life insurance and sometimes long-term care insurance and a possible living trust are also evident.
As the board takes shape, I often observe an interesting phenomenon. This phenomenon becomes apparent as we transition the conversation from what the pieces are, to what the pieces are for. We move from simple asset definitions and balances to the purpose of each asset! Identifying asset types and classes is routine. But, I often get silence when I ask the question, “What is this $80,000 variable annuity or $300,000 brokerage account for?” I get silence again when I ask, “Would you consider this IRA as ‘living’ or ‘leaving’ money?” It’s as if one hasn’t thought these purpose driven questions through. We spend our lives accumulating, but very little time thinking about what the assets are for or what jobs we want them to perform.
If we can’t identify the purpose of an asset and answer the question, “What is the money for?” then we can’t position the asset in such a way to provide for that function. 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. This hails back to the second, third and forth chess moves visualized by an accomplished chess player. Again, if we don’t know what the money is for, how can we create meaningful strategies and outcomes to meet our goals?
For seniors, assets must be positioned correctly for a variety of purposes. Consider survivorship. What happens when one person passes and the surviving spouse needs to replace lost Social Security or pension income?
Inflation protection is also a factor. Living in retirement on a fixed income for 20+ years can create budget pressure. Gas is nearing $4.00 a gallon again. What will it be in 2025? To be frank, with the Social Security trust fund stressed, an over-reliance on government annual COLA adjustments is naïve.
What about long term care? A prolonged long-term care event can devastate an estate. Rather than paying an ever-increasing traditional long-term care policy premium, one can use other more effective asset-based options for long-term care protection. Unfortunately, few are aware of this more efficient alternative.
And what about legacy? If we think certain assets are likely to pass to future generations, wouldn’t it be better to earmark those assets now? Just this week, I identified $300,000 in an 84 year old widow’s portfolio that if properly positioned could provide an immediate $400,000 tax free death benefit to her two children at her passing. She knew this money would pass to her kids anyway, so she recognized this as a great option to safely grow her legacy. Remember, certain assets pass tax-free while others create tax problems for heirs.
Some might consider advanced planning as creating inflexibility or a feeling of being locked in. Not so! When a sensible plan is put into place, with the right chessboard pieces working together, one can often have their cake and eat it too, but one must answer the question, “What is the money for?”