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1. Evaluate Liquidity and Cash Flow. Having a cash cushion large enough to cover 6-12 months of expenses has always been a key to financial health, according to Ronald Florance, CFA, director of asset allocation and strategy for Wells Fargo Private Bank. However, in the wake of the 2008 market crash, many people have chosen to increase the amount of cash or cash equivalent investments that they hold to an even greater extent. If you have sufficient cash or cash equivalents to cover all contingencies, you are more likely to stick to your long-term financial plan during market fluctuations. “It’s really about how much liquidity you need to sleep well at night in a market environment such as this,” Florance says. However, it is also worth remembering that the return that you are getting from your cash holdings may be lower than the rate of inflation. Moreover, you may still have similar financial goals to those you had before the market correction, so it is important to meet with your wealth advisor to determine a suitable balance between cash and cash equivalent investments and other assets in your portfolio. In addition to your cash holdings you may want to consider the source of your income stream—a pension, rental property, etc.—and whether it is still capable of meeting your needs. The credit crisis and mortgage meltdown have left many investors with empty buildings and little chance for refinancing. This comes at a time when returns from other investments can no longer sustain monthly financial obligations—selling in this environment also poses unique challenges. If you discover that your income stream is not adequate to meet your day-to-day cash flow requirements, you may want to make some adjustments to your portfolio as well as establish “rescue” plans for existing financial and estate planning strategies which may fail if left unattended.
2. Define Your Goals. Once you’ve taken stock of where your finances are, it’s important to identify your aspirations. Life changes—and even financial ones—can impact your priorities, so even if you’ve defined your goals in the past, take the time to revisit them. “One of the most important things about those goals is your time horizon,” Florance reveals. Identifying your goals and a reasonable timeline for accomplishing them will help determine your tolerance for risk when investing. Marketing surveys have indicated “lifestyle impact” has been cited as the biggest concern for many clients as they delay retirement or are forced into returning to work in a retracted workforce.1 Priorities certainly have shifted, and many people need help with a dialogue around options.
3. Visualize Your Retirement. In addition to identifying your goals, you should define the life you want to lead in retirement. Start by pinpointing your primary motivation for retiring, such as starting a hobby or spending time with family. “Retirement is the ending phase of one career, but it could be the beginning of another,” says Teresa Ridge, a senior wealth management director for Wells Fargo Private Bank. Once you understand your vision for retirement, it is easier to negotiate a balance between when you want to retire and the kind of lifestyle you’d like to lead. A general rule of thumb recommended by Florance is that you can consume up to 4 percent of your assets per year without risking their ability to sustain the rest of your life.
4. Revisit Your Asset Allocation Strategy. We suggest that you re-evaluate your asset allocation taking into account any changes in your risk tolerance, return requirements, cash flow needs, tax exposure, time horizon and liquidity needs. If you have held assets for more than three to five years, consider whether they are still a good fit within your portfolio. Now may be a good time to rebalance, and take advantage of any capital losses that can offset capital gains and improve the overall tax circumstance of your portfolio. If you have made long-term capital gains in these positions, you may find that these assets have embedded tax liabilities. You may want to consider these assets as part of a gifting strategy to transfer wealth to family members. Working with a financial planner will help you create a strategy for evaluating your assets and provide professional assistance in dealing with changes.
5. Consider Gifting. If you have considered gifting as part of your wealth transfer strategy and have the fortitude, now may be a good time to do it, Ridge asserts. A transfer of depreciated assets may have positive tax advantages, allowing your beneficiary to potentially benefit from a tax-free gain should asset prices rebound. We suggest discussing the merits of gifting different types of assets with a wealth planning specialist to help you understand the pros and cons of such a strategy at this time. “While gifting can be a good idea,” Ridge reminds, “you might need to be creative about what you give.” Unprecedented low interest rates, and lower property and business valuations, make for an attractive opportunity to transfer shares of the family business to the next generation—maybe sooner than anticipated. This affords business owners more time to “groom” their successor and create a solid business succession plan. Successful business succession planning can help extend business viability beyond the second generation.
 6. Look at Your Tax Situation. With a growing budget deficit and the expiration of the 2003 tax cuts, chances are that taxes are more likely to increase for high net worth families over the next couple of years rather than decrease. Florance suggests that, in view of the changing tax environment, it is sensible to sit down with your tax advisor to determine whether your estate plan has kept up with recent changes to the tax code and discuss any further adjustments you may want to make in anticipation of future changes in the tax code. For example, any estate or financial planning strategy over the last five years based on the assumption that assets will continue to appreciate, should be reviewed as a priority. There may be tax implications or opportunities for asset swamps with current depressed values. The Internal Revenue Service continues to look into discounting for minority interest loopholes for business and other such entities. Discounting as we know it may come to an end soon, so it is imperative to make tax planning a priority.
7. Revisit Your Insurance Strategy. It is important to ensure your policies do not lapse. Ridge prompts that it’s risky to depend solely on the agent who sold the policy to monitor the performance of this vehicle: if left unchecked, a vast majority of policies lapse due to inability to pay the escalated premiums required to maintain the original desired level of coverage. Additionally, health conditions may restrict the affordability of premiums if too much time has passed between policy reviews. A lapsed policy can have significant financial implications, so it is important to work with a financial planner who has the specialized skill to review the policy periodically for performance and whether the policy continues to meet your objectives. Instead of being an afterthought, you should review insurance alongside an overall wealth plan, as insurance offers income replacement, disability coverage and long-term care, as well as the potential for liquidity as a tax-efficient way to transfer your assets to heirs. As this economic environment has claimed many an insurance carrier, it is important to determine what insurance coverage is in place in addition to investigating the strength of the carrier. You may find that a majority of enforce illustrations are based on unrealistic former and future returns. Because insurance is designed not only to leverage assets but also to fill the financial and estate planning “gap,” you may find the “gap” is actually bigger and needs to be addressed in the same fashion as an investment portfolio—with a methodical process addressing the factors previously mentioned.
8. Identify Your Philanthropic Vision. Philanthropy isn’t just about supporting causes you believe in; it teaches the next generation about how they can have an impact on the world, according to Florance. If there are causes and organizations that you value and want to support, start by taking stock of the assets you can give. Once you and your financial advisor know what you have to work with, you can develop a plan for distributing the asset to benefactors. More than ever, many worthy institutions are left without funding they have relied on—both from local and state agencies and also from wealthy benefactors who may have been targeted in so-called ponzi schemes. Time and experience also are valuable assets to consider as part of your giving strategy, especially when financial contributions are not feasible due to market conditions. Ridge takes this a step further: “We find many clients appreciate the bond they build alongside the younger generation when doing volunteer work. This is an activity that not only teaches the value of giving but actually role-models philanthropy.”
9. Plan for Your Heirs. Just as your philanthropic endeavors reflect your values, so too does your transition of assets to heirs. Understand that your choices—who receives an inheritance, when it occurs and what type of assets they will inherit—all carry a message, Florance says. For instance, if you are a strong proponent of education, you may want to provide for all of your grandchildren’s school tuition, he says. Begin the process by identifying who is in the best position to continue your vision, Florance says. As you make these vital decisions, remember that equal doesn’t always mean fair. If, for example, someone has a special need, it may be fair for him or her to inherit more.
10. Have a Financial Checkup. Your wealth planner should empower you to make informed decisions about your estate. This is why it’s important to ask questions and insist on answers that help you understand the dynamics at work in and around your estate plan. “You need to make time for that checkup every single year,” Ridge says. Your planner should know your primary aspirations, your values, your charitable intent, the lifestyle you want to lead in retirement, and your legacy goals, because these are the factors that should guide your wealth plan. Your advisor should be a partner in all aspects of financial planning, so make sure he or she is up-to-date on your financial situation and life goals. TPB Given the state of the economy, people are making concerted efforts to tighten their belts and may view financial planning as a luxury they should not indulge or may not feel it is important because their net worth is substantially lower. It is exactly these financial conditions that should prompt and spur the need to talk to an advisor to review the current needs and future goals. You may be surprised how a change in a saving pattern, asset allocation, gifting, insurance and planning—to name a few—may still allow you to achieve the goals established a few years ago. Your financial realities may have changed along with the markets, but the concepts of investing and wealth planning haven’t changed, reflects Florance. Achieving your financial and life goals still begins by knowing what you’re passionate about, and continues with a strategy to realize your vision.
Wells Fargo Private Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.
Wells Fargo does not provide tax or legal advice. This article is for information and education purposes only, and should not be construed as tax or legal advice, which Wells Fargo and its affiliates cannot provide. Please consult your professional tax and legal advisors to determine how this information may apply to your own situation.
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