Why do I need liquid assets for retirement and estate planning?

When it comes to your long-term financial and estate planning needs, liquidity is critical.

Some people have too much money tied up in illiquid real estate, private equity, business entities, etc., or they just don’t “trust” the stock market. These practices present significant financial roadblocks.

Liquidity provides the freedom and flexibility to turn your assets into part of your cash flow, which will be useful down the line.

What is liquidity, and why does it matter?

Let’s find out.

What Is Liquidity?

At a basic level, liquidity is defined as how easily an asset can be converted to cash.

A few examples of assets that are liquid include:

• Cash
• Certificate of deposit (CD)
• Stocks
• Bonds
• Exchange-Traded Funds (ETFs)
• Mutual Funds

In contrast, a few examples of assets that are not liquid (or illiquid) include:

• Physical real estate
• Small business
• Stake in a privately held company
• Physical gold
• Antiques, collectibles, and fine art
• A loan made out to a friend

While you may not be surprised to see cash and CDs on the liquid list, stocks could come out of left field. Stocks are a liquid asset. While they aren’t as liquid as the $20 in your glove compartment, you do have the ability to buy and sell them. Stocks have a marketplace. By purchasing a publicly-traded stock, you can sell your shares and receive proceeds in a matter of days. The same idea is true for bonds, ETFs, index funds, mutual funds, and more.

Liquidity Gives You Options

One of the major benefits of liquid assets is simple: choices.

Liquid assets provide the freedom and opportunity to use them when you need to. It allows your plan to be nimble and gives you more options from a planning perspective, especially in retirement and estate planning matters.

In addition to flexibility, liquid assets offer several other benefits:

• They are less costly and time-consuming to administer. In that sense, time really is money.
• You can more easily put a tangible value on the investments. Take public equities as an example. The daily pricing can help illuminate the actual value of a particular portion of your nest egg. Illiquid assets, like your business, can’t display that same value.
• Liquidity allows for greater diversification opportunities on your balance sheet.

Let’s take a closer look at two important examples.

Roth Conversions In Retirement

An optimal time for some households to consider Roth Conversions is the window between retirement (usually age 65) and when Required Minimum Distributions (RMDs) begin (currently age 72). During this period, income may be much lower than in your accumulation years and the time when you take your RMDs.

Lower-income years present excellent opportunities for Roth conversions. But remember, you must be prepared to pay taxes on the conversion, so you’ll need liquid assets to cover the bill.

Having liquid assets in pre-tax IRAs makes completing Roth conversions that much more feasible to execute.

Gifting Strategies

Say, for example, that you’re concerned about the federal estate tax exemption, and you want to give away more money to your family, children, and loved ones while alive. Under current IRS gifting rules, individuals can give a set amount each year to anyone without triggering gift taxes. Married couples can combine their limits to give even more. Making full use of this annual exclusion can be a smart way to transfer wealth gradually and tax-efficiently.

Implementing this strategy is far more reasonable with a healthy amount of liquid assets. If you only own physical real estate, it would be inefficient (and nearly impossible) to do that in smaller increments.

Your Estate Plan Can Benefit From Liquid Assets

Efficiency and simplicity are the markers of a solid estate plan. While wealth-building, generational wealth, and tax efficiency are key, it’s often best to avoid complexity where possible. Liquid assets can help ensure your estate plan doesn’t leave your family members too deep in the weeds.

Below are several essential items to consider:

• 529 College Savings Plans are exceptional estate planning and wealth transfer tools. Because the cost of college requires six figures of liquid assets, this is a great vehicle to consider. These vehicles provide flexibility (you can change beneficiaries, with specific rules), provide tax-deferred growth and tax deductions for contributions (in some states).
• If you know you want to split your assets between your children fairly, having liquid assets makes that plan simpler. You won’t have to solely rely on outside valuations to place a monetary value on various illiquid assets.
• By having liquid assets, you plan for any potential estate tax liability you may owe. The IRS requires liquid assets to pay any estate tax liability within 9-months of death. You never want to have a fire sale to meet an unexpected cash obligation.
• Finally, liquid assets are vital for generational wealth. Preserving generational wealth is a challenging feat, often because of a lack of planning. Perhaps the next generation isn’t as well versed in your niche private equity investing, which could jeopardize some holdings. It’s best to create a holistic plan that considers the story of your wealth and how the next generation can take it to write their own chapter.

For an introduction to estate planning, read our recent article, “Estate Planning Primer.”

Create A Comprehensive Wealth Plan

Liquidity is yet another financial tool to help you reach your goals.

Properly implementing liquidity into your financial plan can help structure your balance sheet to support your goals.

When you understand your goals and values, our team can help you create a comprehensive financial plan that aligns your money with the things most important to you. We want to help you optimize your life and legacy today, tomorrow, and for generations to come.

How does liquidity relate to your financial plan? How does tax planning with a financial planner improve the plan? Learn more about how our investment advisor can help you today!

Please contact us for more information.