Are there 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

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