This is part of an ongoing series of articles about estate planning and succession planning, written by Joe Maier, JD, CPA, Senior Vice President, Director of Wealth Strategy

A disease that we don’t understand. A solution, social distancing, that we have never experienced. A stock market reacting negatively, as the stock market does, to uncertainty. An economy stressed by being shuttered. That is a lot of uncertainty.

In times of uncertainty, it is critical to separate things we can control from things we cannot. Once we make that separation, we can address what we can control to maximize our chances of success.

To make that separation–and then to prompt informed action–a financial plan is critical. You may already have a financial plan and the current crisis has prompted you to revisit it. Or, you may not yet have a plan and, in facing a sudden spike of uncertainty, have realized you need one.

Either way, it’s helpful to step back and review just what, exactly, a financial plan is and what it’s designed to do. Even—or perhaps especially—in a time of crisis, it’s helpful to zero in on such basics, because they can help clarify thought.

In this article, therefore, we will discuss how we design plans to protect our wishes, hopes, dreams and desires. We’ll also discuss how we adjust those plans in times of uncertainty.

Happiness is the Destination.

A financial plan is a strategy wherein you define:

  • what makes you happy
  • what assets and income you have and
  • how to use that income and those assets to maximize your happiness

So your plan starts with defining your happiness. In fact, your happiness should be viewed as your plan’s destination.

Your happiness will be achieved if your plan uses your assets and income to balance your needs, wants and wishes. Your needs, in the financial planning context, are not limited to food, clothing and shelter, but rather consist of your normal monthly standard of living. Your wants are your desired lifetime experiences and luxuries--things like vacations, second homes, and luxury automobiles. Your wishes are what you want for the people you care about. That might be a legacy you want to leave your children; it might be a substantial gift you would like to give to your alma mater.

Your plan needs to balance your needs, wants and wishes in a way that maximizes your happiness. And your balance is unique to you. Your happiness might be maximized by guaranteeing that your needs will be met. Or you might be willing to risk meeting your needs if the plan allows for the potential purchase of more of your wants. Or you might scale back your needs to allow the plan to purchase more of your wishes. The point is that balance comes from how you define happiness as reflected in your plan.

Values, Behaviors and Assumptions.

So once you define your happiness, the plan needs to be designed to use your income and assets to maximize your happiness. The plan’s success is dependent on four factors:

  • the amount of your income
  • the value of your assets
  • growth assumptions
  • your behaviors

First, the success of your plan is determined by your income, from sources such as earnings, social security, pensions and annuities. The greater your income, the less assets you need to liquidate to pay for your needs, wants and wishes. Second, your plan depends on the value of your assets. The more valuable your assets, the more needs, wants and wishes they purchase. Third, the success of your plan is dependent on investment growth. The more your assets grow, the more needs, wants and wishes can be met. And finally, your plan’s success is driven by your behaviors. The more you save, the better your plan will work. The less you spend, the longer your plan will work.

Within the context of these four factors, it is good to understand what you can and cannot control. You can control your willingness to work but cannot control whether someone will hire you. You can control your guaranteed income, from sources such as social security, pensions and annuities, but you have less control over dividends or royalties. You have full control over the value of assets like cash, you have some control over assets like bonds and you have very little control over the price of stocks. As for investment growth, you have control over guaranteed rates of return like interest on certificates of deposit but virtually no control over the growth (or loss) of stocks.

Taking all of this together, there are many facets of a good financial plan that you do not control. But, critically, you have unfettered and total control over your decisions and choices. And those choices make all the difference between a plan that works and maximizes happiness and one that doesn’t.

Building Plans for and then Recalibrating Plans in times of Uncertainty; Maximizing the Power of Choice and Minimizing the Destruction of Chance.

Having looked at why we plan, how we plan and what we can control, let’s turn our focus to what you should do in times like these—times of great uncertainty. Let’s start with the building phase of the plan. If you start with dividing your goals into needs, wants and wishes, logic dictates that the best plans should be designed to always provide for your needs, frequently provide for your wants and hopefully provide for your wishes. Again, let’s take a step back and remember that how you define and prioritize your needs, wants and wishes are unique and personal to you, but given the definition of needs, wants and wishes, your plan should be “bulletproof” on meeting needs. Stated another way, if your plan cannot meet your consistent monthly expenses, you either need to suffer from a material change in your basic lifestyle or perhaps go back to work. Neither choice is a “happiness maximizing” choice. Taking a step back, what that means from an asset and income standpoint is (1) your plan needs sufficient guaranteed income to always provide for your needs, (2) your plan needs to be funded with enough assets that, even if their performance is burdened by underperformance, are sufficient to provide for your needs or (3) a blend of both of those strategies.

Like any choice, your decision on how to fund needs involves tradeoffs. For example, while guaranteed income provides peace of mind that needs, as they currently stand, will be met, needs can change. Health care is the obvious example of a need that could have materially increased costs. Also, guaranteed income, while having no downside risk, also has no upside. That income will always cover needs, and only needs. In contrast, liquidating assets to cover needs has the downside risk of requiring liquidation when the market is down. This downside risk can be mitigated, to a great extent, through intelligent, consistent cash flow planning. Further, the advantage of using marketable securities to meet needs is that as the market grows—as it has historically done over time—those assets provide a hedge to inflation in the costs of needs and can also play a dual role by being available to purchase more wants and wishes.

Now if we go beyond the building stage to the plan execution stage, the question becomes how does your plan handle times of market underperformance and volatility? Here it is important to think about what you control and do not control. You control whether to sell your assets. You control what you spend, at least above your needs. You also have the ability to redefine your needs, at least to some extent. If your plan includes guaranteed income, you have peace of mind knowing that income can be counted on. On the other hand, you do not control the value of your marketable securities. You cannot control, in the short term, consistent monthly expenses like mortgages, property taxes, car payments and utility costs.

Putting all of this together, especially during times like these, the first thing you should do is contact your adviser and stress test the viability of your plan. In other words, given the interaction of what you can control and what you cannot, does your plan still work? This “worst case” analysis answers the most critical current question: will your assets (under a long term plausible worst case scenario) and income cover your lifetime needs. Generally, if your plan was built to provide for your needs, wants and wishes, a “needs only” plan will be viable. This is critical because, given that you have full and unfettered control over your wants and wishes, the success of your needs based plan is totally in your control.

But while the peace of mind that comes from this control is the threshold goal, it is not the only purpose of plan recalibration. Next, you and your adviser should begin to rebuild your plan assumptions. Historically and consistently, times of deep market downturns are followed by better than average market performance. All of us know in times of great worry and concern, there is no better emotional medicine than hope and faith. Confidence that your wants and wishes, while perhaps delayed, are ultimately safe under reasonable assumptions should boost your spirits.

Finally, how you provide for short term needs has a dramatic impact on the viability of the plan. In times like these, without sufficient guaranteed income to meet all of your needs, some assets will need to be liquidated to meet your needs. Simply put, from a strategic perspective, while you might not have the perfect assets to liquidate, some assets are better than others. And these are the times where you need the right adviser by your side. While we all intellectually understand that stocks should be bought low and sold high, in times of great volatility, emotions predominate logic and, if left to our own fears, humans engage in emotionally satisfying yet illogical acts of selling stocks into a market downturn. While the reasons we do things like this are wide and varied (stopping the pain, trying to capture a momentary upturn, selling the “wrong” stocks, following the herd), it is something that upon later, calmer reflection, you will almost assuredly regret.

Conclusion

This is why you hired your wealth adviser, to empathetically guide you in times of uncertainty. Investment performance is certainly important, but there are no investment decisions that can overcome ill-advised, ill-timed liquidation choices. Your adviser coaches you to remember the long term nature of your plan, and to remind you of the destructive results that the wrong short term decisions have on your long term goals. Your adviser understands you, understands what and who you care about, has been through market conditions like this before, and knows how to coach you during periods of great stress. In any market environment, it helps to have such a partner in your corner; in times of stress, a partner—and a plan built with your happiness as the destination—is essential.

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE

by Joe Maier

Joe has extensive experience helping high‐net worth individuals, family offices, business owners and corporate executives meet their wealth and legacy goals. His areas of specific interest and skill include business succession planning, financial and estate planning, and wealth transfer strategies.

READ MORE about Joe Maier.