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Allocating for Final Goals

by Charles Rotblut, CFA

Are there are goals you want to accomplish before or at death that require a significant financial commitment? If so, have you allocated your portfolio accordingly?

The vast majority of financial guidance and advice regarding retirement focuses on ensuring that savings last throughout the remainder of a person’s life [see the Financial Planning article in this issue]. Though it is a critical part of financial planning, such guidance does not fully address the planning questions of those fortunate enough to have more than is needed for retirement expenses. It also often does not address planning and funding final lifetime goals. This month’s Retired Investor column addresses those goals.

Timing and Amount

The cornerstone of planning for any large financial expenditure is the timing and the amount of the expenditure. For example, say you want to help pay for a grandchild’s college tuition. You can calculate the date based on the child’s current age and grade level. You can also estimate the amount needed by assuming a certain growth rate in tuition and fees. This gives you a timeline and a dollar amount to begin planning for.

But if you want to leave a financial legacy—whether to your heirs, a charity or a religious institution—the timing is uncertain. You can identify a portion of the amount to leave by establishing trusts and other estate planning vehicles, but the timing of your death is unknown (and hopefully far into the future). Also unknown is the value of your estate at death. To the extent you can carve out a portion of your wealth now, you can set aside that part of your portfolio to be managed differently than your retirement savings. Specifically, if the money is not going to be spent immediately after your passing, you can follow a long-term, growth-oriented strategy for investing the money.

Alternatively, you may have a goal that you would like to fulfill sooner rather than later. Perhaps you have always wanted to do something expensive, like an around-the-world trip. Maybe you’ve always had your heart set on owning a luxury sports car or having a condo in Hawaii. Fulfilling these dreams requires identifying the cost and using a conservative investing strategy.

Think in Terms of Buckets

Once you identify your goal(s), the timing and the approximate cost (or how much you plan to set aside), consider segregating the money from the rest of your portfolio. Though all of your accounts contribute to your net worth, the money you plan on spending for your final goals can be invested in a very different manner than the remainder of your retirement savings.

Let’s take one of the aforementioned examples to demonstrate how this would work. Say you would like to buy a sports car. A Porsche 911 Coupe S Turbo (you want something fast, right?) costs $158,000, according to TrueCar.com. If you plan on buying the car within the next few years, you should hold the cash in a money market account, a short-term CD or the equivalent. The car is a planned short-term expense, and you never want to risk money that you will need to spend within the next few years. Since the money is segregated, you can continue to manage the rest of your portfolio in a manner that provides lifetime income and capital growth.

If you want to leave money to a charity, contact the charity and a tax professional. There are strategies that can maximize your tax deduction, optimize your financial planning and benefit the charity—a win-win situation.

Regarding inheritances, think about whether your heirs will need the money immediately or can, and are willing to, let the investments grow. An estate lawyer can help you with these plans. The key, as you can tell, is budgeting and allocating—something you have done your entire life. Identify the cost and the time horizon and then manage that portion of your portfolio accordingly.

—Charles Rotblut, CFA, Editor, AAII Journal

 

Other Articles in the Retired Investor Series

Limiting Required Minimum Distribution Costs, by Charles Rotblut, May 2011

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Aging’s Adverse Impact on Decision Making, Charles Rotblut, July 2011 by

Retired Investor: Getting Through Difficult Markets, by Julie Jason, November 2011

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


Discussion

Eric Djavadi from CA posted over 2 years ago:

Dear Mr. rotblut:

Please make the "KISS" as one of your principal editorial rules! Almost all of the written stuff comes out of AAII are too long (full of fluff)!

If you can not express it simply and concisely in a few sentences, please do not say it at all. Authors who are afflicted with verbosity, either do not know what they saying or they are too confused saying it simply in a short form.

The AAII Journal should become a thought provoking twits! I am sure that the majority of the membership will be "richly" rewarded.

Regards,
Eric


Joshua Agsalud from HI posted over 2 years ago:

To Eric Djavadi: I find your comments disgusting. The AAII Journal is an academic endeavor as are other Journals. If your comment is directed at Mr. Rotblut, he is an excellent writer. His weekly AAII Investor Updates which we get weekly via email are timely, well composed, clear and concise. This particular AAII Journal article is well-organized, informative, and easly to comprehend. If you are directing your remarks to those who write for the Journal, I repeat, this is an academic periodical, published by professionals who are experts in various subjects relevant to investing, for members of the American Association of Individual Investors (once in a while it is helpful to think of us members as that and not just the acronym AAII). Your criticisms indicate that you are the problem when you advocate the insulting acronym KISS (Keep it simple, stupid), when you write poorly (exclamation points, poor grammar, capitalization errors)and when you invoke "hip" terms such as "stuff" and "twits". I think your frustration stems from the fact that you cannot read at a higher level from where you are wedged.


Albert Grigsby from OH posted over 2 years ago:

I find problems with both comments. The first is a result of too much emphasis on sound bites. Headlines only without any meat.

The second blog is derogatory and attacking, which is out of place on AAII.

The AAII Journal is a professional magazine and as such is proper place to address topics in detail. Most articles have an excellent summary where one can decide if the topic is worth the time to devel into the details.

I would also like to complement our editor on doing an outstanding job of keeping us posted on AAII related financial information.


William Wenzel from WI posted about 1 year ago:

By the way, it is 2013 now...an update would work.


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