One of the often overlooked aspects of a comprehensive financial plan is determining which assets fund what goals and when. This is one of those areas where not all assets are created equal and, in fact, may not really be comparable at all. Understanding this is important if a financial plan is to function well over time, with funds being available when needed and without unnecessary friction (such as taxes and fees).
A good starting point might be a common type of pre-retirement goal for many folks – funding education for children or buying a vacation home or other similar action. What most clients understand is that their tax advantaged assets – such as a company 401(k) plan or IRA – are intended for retirement and carry with them the likelihood of tax penalties in the event of early withdrawals. Clearly, these accounts should probably not be considered when funding most pre-retirement goals such as children’s education or big-ticket items like a second home. Similarly, an illiquid asset such as restricted stock or mortgaged real property might be a non-starter here.
What a client should have lined up for this type of expected goal is either an account established specifically for the goal, like a Section 529 plan for higher education, or a highly liquid taxable (or tax exempt) account such as certificates of deposit or unleveraged brokerage accounts. These types of accounts typically allow the client easy access when it is time to disburse funds for the goal and without either outright prohibition or extra costs such as tax penalties or excessive sales commissions.
Where financial planners and clients may fall short in their planning is where they look at the balance sheet and see substantial and sufficient values to cover goals but fail to understand whether those values are actually readily available at the time they will be needed. Of course, in some cases, illiquid assets might be used as security for a loan to cover the goal, with the expectation that subsequent cash inflows will allow the client to service and retire the loans.
The point is that your financial plan should consider the best method of paying for different types and timing of goals and not simply assume that because you have assets there won’t be any issues with covering those goals. This type of advice can make a good financial adviser a real asset to clients.