Financial Solutions

Financial Solutions

Financial Solutions

Financial Solutions

Feb 02, 2018

How to Create a Succession Plan for Your Portfolio

Follow these key steps for a smooth transition.

There are many questions to consider before deciding the key ingredients for successful retirement portfolios. Stocks for longevity potential? Yes. Inflation protection to help preserve the portfolio’s purchasing power? Check. A cash component for near-term living expenses? Got it.

But one ingredient invariably piques attention more than the others, perhaps because many never give it much more than a nervous thought: a succession plan for their portfolios. Most investors put together savvy investment programs, and many of them have crafted costly estate plans with the help of attorneys. But, they have no clear road map for what should happen to their portfolios if they become incapacitated or predecease their partners. Would the spouse have a precise inventory of all of the couple’s assets? Would he be aware of the strategies in place to keep the whole thing up and running? Where to go for cash? How much he can safely spend each year? Or whom to turn to for financial advice? What about people who are single—who would run their money if they could not do so themselves?

Many people choose to turn their portfolio over to a financial advisor straightaway to ensure there is no jarring transition when the first partner dies. Having a trusted advisor can provide a lot of peace of mind while both spouses are living, too. The same is true for single people. Regardless of your circumstances, your portfolio needs a succession plan. Here are some key steps to take:


Create a Master Directory
This is a basic document you should prepare no matter your life stage, serving as an inventory of each asset you own. Here you should include a brief descriptor (“Jill’s Roth IRA”), the financial provider, account number, URL, password, and so forth. Also indicate the beneficiaries for each of these accounts. Once you have drafted such a document, you have two key jobs: to encrypt it (or otherwise keep it safe) and alert your spouse or another trusted loved one of its existence and how to gain access to it.


Draft a Short-Form Explanation of Your Investment Approach
Perhaps you have prepared an investment policy statement documenting your asset-allocation parameters and policies on matters such as rebalancing and selling. That is important. But chances are you wrote your IPS to keep yourself on track, not inform your spouse of what you are doing. If your spouse finds your IPS inscrutable, it is time to go back to the drawing board and draft something more succinct, in plain English rather than investment jargon. Think about the basic questions you would ask if you took over someone’s financial plan without much (or any) advance preparation. Headings might include:

  • How much you can safely spend each year without running out of money
  • Which accounts to tap for living expenses on an ongoing basis
  • The basics of required minimum distributions and which accounts require them
  • Which accounts to tap as a last resort or that you have earmarked for heirs
  • An outline of the three or four most important financial-planning tasks you handle each quarter and each year (Forget anything that is in the category of “nice to do”; stick to the basics.)

Automate What You Can
To help ensure none of your usual financial-planning to-dos fall by the wayside, consider automating the most important ones. For example, you can make sure that distributions from your income-producing securities get spilled directly into your bank account, thereby providing cash for near-term living expenses. You can also automate your required minimum distributions from your IRAs and 401(k)s, and use the auto-payment feature on your online banking platform to ensure that you do not miss your most important bills, such as your health and auto insurance. If you pay quarterly estimated taxes, and most retirees do, you can use the Electronic Federal Tax Payment System to make those payments electronically.


Begin Building Your Team
If your partner has no interest in or aptitude for financial matters, it is unrealistic to expect he will know how to identify an appropriate financial advisor. Often times, people without a lot of financial knowledge often choose advisors based on their interpersonal skills rather than making an objective assessment of the individual’s financial acumen and whether the business model is a good fit. The onus is on you to vet some advisors for your spouse to ensure their investment approach is palatable, their fee structure is fair, and that you can meet any necessary requirements.


Do all of the above steps make your head hurt? If so, the best way to reduce your succession-planning workload—and the potential workload of your spouse—is to streamline your portfolio. You can reduce the number of moving parts by collapsing multiple accounts of a given type into a single account at one firm—for example, merge multiple joint taxable accounts into a single one and purge your portfolio of so-called onesies, which are small pools of assets held here and there. True, there is no single firm that is the absolute best at every investment type, but a handful of firms offer solid options in all of the major asset classes. In addition to streamlining the number of accounts you hold, you may also choose to switch to lower-maintenance options, such as index funds, and away from higher-maintenance options, such individual stocks and bonds, as you get further into retirement. In so doing, you will reduce your own portfolio-oversight obligations and simplify life for your spouse if they eventually inherit those duties.

© Morningstar 2018. All Rights Reserved. Used with permission.

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