In a few weeks from today the new normal for having more than €100,000 in a Dutch bank account means you have to pay your bank to hold that money for you. No wonder savers are pushed to alternatives of which the stock market is everybody’s best friend it seems. Being forced to accept risk is something you should be careful about actually going along with. Some of us feel we are invested enough and simply need to bring the average risk profile of your portfolio down with money in a bank account. Nine months ago we saw evidence a bubble was being inflated and wondered if it is a very strong kind of soap. To be honest: we are not sure but indications market parties expect a slower pace of deflating become more widespread. Still we think it is worth stepping into the helicopter and look at the big picture of wealth, what it can do and how you can treat it.
What is your estate?
Your estate is delayed income. If you inherited it, your benefactor may have earned it and postponed using it for own consumption and now it is yours. Most of us do not inherit and delay consumption. Delayed consumption of past earnings can take many forms: a home, an investment portfolio, a healthy bank account balance, a pension pot, etc. So your estate could be what your parents left, what you need for your family and what you will leave for the future after you.
We have clients of all walks of life and shockingly few have an idea why they save, invest, etc. There is no plan because they do not answer the question first.
Horses for courses
If you are dependent on part of your estate for your income you do not want to trap that part of your money into e.g. a house or an annuity you can touch from a certain later pension date.
Conversely, when you save or invest for your retirement you do not need all your money on day 1 so you should stage the release of capital converting to income.
When you have a clear expectation about when you want to use parts of your estate you can start thinking about product solutions. Sometimes products with the best expected returns have “fine print clauses” that will severely limit flexibility. We have helped clients unwind Hotel California products (“You can check out any time you want but you can never leave”) Even if messy it still might mean the best you can do. So it is not just pricing but also other product terms determining application in your plan.
Getting your estate where you want it
Do you save income for yourself at a later moment in life? If you think you can lead a comfortable life and if you have enough for yourself, does it make sense to start transferring your wealth to a next generation? And you can also turn the question around: if you do not prepare for your inheritance much of the benefactor’s intentions will land at the Tax Authorities instead of the recipient. Surely not intentional.
Many international clients have the expectation to retire in their country of origin. Regardless, sometimes life deals you a different hand of cards and does that mean because of your former intentions your estate needs to suffer?
Structuring your estate to avoid unnecessary taxation and where needed improve legal efficiency is something you should look into periodically. Your financial planner can help you determine how large or what the bandwidth of financial commitments to phases of your life should be and what products are available to achieve that. The next phase is a discussion with your tax consultant. Because the financial planner has already done a lot of ground work your tax consultant does not need to start from scratch. Then your lawyer or notary, as the case may be, gets involved so solutions are duly executed. As with products, all professionals involved are conscious Hotel California situations must be avoided to the extent current legal and tax expectations permit.
What should you do now?
It starts with updating or making your first financial plan to get your hopes and dreams, risks and remedies into financial perspective. When you have considered how it can best be structured to avoid income tax and inheritance tax leakage the next steps can be taken.
Coming back to today’s financial markets, if you do not need your invested money for another 12-15 years it most likely does not matter if the dreaded second dip occurs. So far we have never seen longer recovery periods. But if you really need it, and sooner, watching the spectacle a while from the bench can also be a good alternative.