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Financial Planning Concept :: Financial Planning :: THE RETIREMENT SOURCE®
Financial Planning Concept

The Most Important Single Concept in Financial Planning is ENOUGH

That is the first thing people worry about as they plan to retire and frequently worry about it afterward. ("Will I have ENOUGH to continue to live the way I want."?) It is also the first thing people worry about when they consider advanced estate planning. ("I don’t want to lose control over any money till I’m sure I will have ENOUGH to meet my own needs.") At any point in time ENOUGH can be defined as a range of values of combined assets and futures cash inflows that would be sufficient to meet all future cash outflows. The mortal sin for any financial advisor is to allow a client to go from ENOUGH, or even more, to LESS THAN ENOUGH. That is why it is crucial to understand all the ramifications of risk and positioning of your money.

In order to be effective in your estate planning, you need to know to a reasonable degree of certainty that you will have ENOUGH. Before you begin serious estate planning, you must know that you will have ENOUGH to take care of your own lifetime needs. That is a quantifiable amount that changes over time and usually (but not always) declines as years go by. Advanced estate planning that may include family and charitable gifting should only be undertaken when you have MORE THAN ENOUGH. It should be aggressively pursued only when you have "TOO MUCH" (That is, when the IRS begins to confiscate your money.)

How Much Money is Enough
↑ Margin of Error ↑

In order to improve your feeling of certainty about where you are on the ENOUGH continuum, it is important to Know Your Margin of Error. This is determined by considering all the worst-case scenarios you can imagine and identifying the adjustments you can make to overcome them. That is the main reason it is imperative to have realistic long-range financial projections including Monte Carlo simulations analysis. Only after you have a clear understanding of this information can you begin to make meaningful changes in your estate plans to maintain control and access, to reduce the costs and tax burdens, to improve your bottom line results and to pass on your own personal value system through your transfers.

The Best-kept Secret in Financial Planning is that it is about CASH

Financial Planning Concept

After deciding what is ENOUGH based on your personal values, the next problem to solve in retirement planning is where you are going to get the cash to live on and support your lifestyle. In estate planning (after the values-based WHY), the next problem to solve is called LIQUIDITY. (That is the ability to access funds quickly at little or no cost.) That means where are you going to get the cash to pay final expenses and taxes? The larger the estate, the more important LIQUIDITY becomes.

CASH is what you need for spending purposes, but INCOME is what you are taxed on. That is why it is important to always Think Cash Flow, Not Income. Ideally, you would always have enough CASH available to meet all your needs, but never have taxable income. This is, of course, impossible. However, the manner in which you decide to meet your cash needs, both now and in your estate, can make an enormous difference in how big the tax bite is and hence your net result. For this reason it is extremely helpful to understand the little known concept of the Tax Position of Your Money.

Know the Tax Position of Your Money

In my opinion most people having high income and/or high net worth are overpaying taxes now or will be in the future. Different types of asset ownership may have dramatic differences in the tax treatment of cash flows, income and profits. In the process of accumulating wealth most people think about the taxes going in, but few consider the tax costs of getting money out. For example, virtually everybody has been advised to put as much as they can into deferred accounts so it can grow "tax free". Because they ultimately must take distributions, they unknowingly take the IRS and other tax agencies on as partners in their growth.

I call this the "Reverse Rumpelstiltskin Effect" because it spins gold into straw (taxes). As an example, high growth assets outside deferred accounts could be taxed at capital gains rates, or not at all if passed through an estate with a stepped-up basis. When the gains are withdrawn from a deferred account, they are taxed as ordinary income at perhaps twice the capital gains rate. Rumpelstiltskin!

We developed a method of analyzing many of the important features of various assets and strategies through a series of GRIDs. These GRIDs enable a simplified classification of certain features into quadrants making ranking the degree of desirability easy. We use four different estate and tax planning GRIDs to sort out the effectiveness of our plans and the potential for improvement.

In this system, Quadrant I always being best with Quadrant IV being worst. Quadrants II and III are frequently nearly equal and are a matter of personal choice. Once you are familiar with this system, then you should be able to make up your own GRID analysis sheets on plain pieces of paper to evaluate your own plans.

As you review your assets and strategies, it is important to know where each is in the respective GRIDs. Intelligent planning can often result in shifting some assets to more favorable positions.

Certain deferred accounts can be veritable "tax traps" for some people. On the other hand, there are ownership forms that may offer benefits of both income and estate tax advantage. In fact, over the long-term, the efficient tax position of a given asset may mean more to your bottom line than your raw rate of return.

One example is the Traditional IRA versus the Roth IRA. Traditional IRAs are in Quadrant II, which is not all bad unless a large proportion of your assets are in that quadrant. This can result in substantial income taxes and, in some cases estate tax problems. Roth IRAs, on the other hand, are one of the few ownership forms that are in Quadrant I - no income tax on contributed after-tax dollars or earnings ever during the owner’s lifetime (for owners over age 59½, after the account has been active for five years). If Roth IRAs are left to beneficiaries after death, they will be required to withdraw funds based upon their life expectancy, but will never have to pay income taxes.

You can plot the Tax Position of Your Money by using an Income Tax GRID. In some cases, you can change the characteristics of ownership by reregistration to improve your income tax status as in a Roth IRA Conversion.
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