A common fact pattern for our clients is that they will have multiple income streams when they stop working. Social Security benefits, private pensions, annuity payments, income from real estate holdings, income from private equity and mineral royalty checks: these sources of income will often play a vital role in creating a successful long-term plan for financial independence. A common fact pattern in the wealth management industry is that advisors will many times not pay attention to any assets or income streams of clients that reside outside of their managed investment accounts. In other words, advisors will create a financial plan for their clients looking just at the investment accounts that they manage—a fraction of a family’s wealth that often drastically underestimates financial independence. To remedy this, it is critical that a full financial plan incorporates all assets on a family’s balance sheet. Consider investment real estate. Most families with whom we work have some sort of vacation property or rental. Whether it is a ski condo in Vail, a beach house in Florida or a pied-à-terre in New York, the rental income from such a property can be substantial and well in excess of the annual upkeep. It is an income stream that needs to be counted in a financial plan. Further, a family will often own a property solely for investment purposes, like an apartment building or a commercial warehouse. The rental income can be thousands of dollars per month and highly relevant to a financial independence calculation. Why is it so important to incorporate all of a family’s assets into a financial plan? The biggest reason is that you need to manage risk. By focusing myopically on a client’s investment assets, a wealth advisor may be missing some of the most important parts of a client’s balance sheet. Would you want to be invested heavily in REITs and real estate placements within an investment account, if you had millions already invested in direct commercial real estate? Of course not. You would be overloaded with real estate risk. The same goes for clients who may own oil projects and mineral rights—naturally these clients would want to minimize their exposure to energy investments in their investment accounts with a wealth advisor. Without understanding the full balance sheet, an advisor is not able to properly deliver the right asset allocation advice. Income is the second biggest reason for incorporating all of a client’s financial assets together. If a family receives substantial income from real estate, a private business or a private investment, this can drastically increase a client’s Retirement Shock Absorber® and reduce the size of required investment accounts. By way of example, let’s say that a family wishes to spend $500,000 of gross income per year in retirement. To ensure a sustainable withdrawal rate of $500,000, a family would need to have roughly $12.5 million in investment assets to support this annual budget. But if a couple receives $50,000 from Social Security benefits, $100,000 from rental property income and $50,000 from an annuity, they already have a gross income stream of $200,000 per year. The remaining $300,000 income requirement would then come from their investment assets, which would need to be about $7.5 million to sustainably support this spending level. The bottom line: by incorporating a family’s various income streams, they can successfully reach their annual spending goals with $5 million less in their investment accounts. Families with substantial and diverse assets on their balance sheets require sophisticated financial planning. Don’t settle for a wealth advisor who gives narrow and incomplete advice. We welcome the opportunity to take a comprehensive view and analysis of your retirement plan that is much broader than just your investment accounts. If we can be a resource to you as you ponder retirement, please don’t hesitate to contact our team.
