Preparing For Life’s Milestones

Reaching the end of your career by retirement or having a liquidity event, creates the most important financial intersection of your life. The steps you take prior to this major milestone and the plan you create can drastically improve the outcome for the rest of your life and generations to come. We believe there are a few key steps everyone should follow to ensure a successful transition.

1. Pick Your Team

The first step when you reach the next phase of life is selecting professionals to become your personal “Brain Trust” who are highly competent in their area of focus. It is critical to ensure that your team of advisors have the relevant expertise, experience, and successful track record in assisting clients through retirement and liquidity events. When searching for financial advisors, you should work with a large team who have access to a variety of different investment opportunities. Another suggested preference is that they are a fiduciary and will place your needs above their own. For accountants and estate attorneys, you want to be sure they have experience dealing with someone in your industry, this way they have a deep knowledge of the unique challenges you may be facing. Additionally, you want someone who is up to date on all tax and estate law changes, as there have been many in the past few years. Most importantly, these trusted partners must work as a cohesive team to allow maximum collaboration in their advice to you.

2. Develop a Financial Plan

You may find that as your net worth grows, so do the number of details surrounding it. Careful attention to these details can have more of an impact — positive or negative — on your family’s long-term financial health than your investment portfolio. You must create a comprehensive plan to help protect, grow, and potentially develop an income stream from your investments. During every stage of your life, your balance sheet will change. Even in retirement, some debt can be a good thing, depending on what kind of debt it is. A financial plan will consider how you might make the most of your available assets in the context of your life goals.

3. Create an Asset Allocation

Clients should be investing in any market that offers a high potential of return. The 60/40 standard stock and bond mix for retirement may not be suitable for every client. This is certainly true because the number of investment choices and asset classes available to the public has increased substantially over the last 10 to 20 years. Once a diverse portfolio has been created, investments need to be carefully monitored. In today’s world, the markets can be quite volatile. Markets are moving in shorter investment cycles with more volatility than in the past.

4. Determine Potential Tax Liability and Explore tax reduction strategies

A liquidity event or retirement may significantly change your tax situation. The plan you create must consider your potential tax liabilities and the current tax laws that impact you. This understanding will allow you to make informed decision. For example, your tax rate may change drastically once retired, creating an opportunity to do a Roth IRA conversion. According to the current tax laws, there are quite a few options that may reduce tax liabilities. This planning should start prior to retirement or a liquidity event, because you may need guidance on the creation of trusts and developing long-term funding/gifting strategies to be as tax-efficient as possible.

5. Review & Update Existing Estate Plan

An estate plan is essential to every financial strategy. It may help leave a larger legacy, reducing transfer taxes, and possibly avoid disinheritance. The first step to estate planning is to make sure all assets are properly titled. The estate tax and planning landscape today is very different than a few years ago. Both the American Tax Payer Relief Act of 2012 (ATRA) and The Tax Cuts and Jobs Act of 2017 (TCJA) altered the estate planning environment through their adjustments to the income tax regime, federal estate tax, and gift taxes. Prior to ATRA, the federal estate tax exemption amount went from $600,000 (single person, double if married) in the 1980’s to $3.5 million (single person, double if married) in 2009. When ATRA was passed in 2013, the federal estate tax exemption amount increased to $5 million per individual, or $10 million per couple. The maximum estate, gift, and generation skipping transfer tax (GST Tax) was set to 40%. For 2022, an inflation adjustment has lifted the exemption to $12.06 million per individual, or $24.12 million per couple.

By Andrew Lerner, Top Advisor

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