Transitioning into your new financial plan may sound like a one-time event, but it’s not. It’s a process that – depending on the situation – can be rather lengthy.
During this step, your financial advisor will primarily consider two aspects for you: investment transition and other immediate needs. After evaluating your tax situation, you’ll work together to draft a plan for your investment transition.
Taxes Drive Your Investment Transition
The goal during this part of the process is to move you into the right portfolio as quickly and inexpensively as possible. Anyone can do it quickly – it’s the inexpensive part that is our specialty.
The main driver of your investment transition plan is your tax situation, especially taxes from capital gains. By taking taxes into consideration with an investment transition plan, we are saving you money.
The Two Types of Transition Plans (and How to Choose the Right One)
Your financial advisor will work with you to choose one of two types of transition plans, depending on your situation.
A capital gains budget plan recognizes a certain amount of capital gains over a given time period. Typically, you want to use this if you’ve built up a large amount of capital gains and want to spread out the tax hit.
The challenge with this plan is that it’s harder to know when the transition will finish. By recognizing a certain amount of capital gains over a given time period, you could be lengthening the process. It may also result in more or less risk than you’re comfortable taking.
A time period transition plan, on the other hand, sells a certain amount periodically. The goal is to fully transition within a certain amount of time. This is generally used when capital gains are not as much of a concern.
The challenge here is that you have less control over the exact amount you’ll lose to capital gains tax, but you have a more concrete timeline to having a portfolio that is appropriate to your needs.
So which one right for you? That’s for you and your advisor to figure out. We will work with you and consider your situation carefully before implementing a transition plan.
Some aspects we will consider:
- Your financial stage in life (e.g. how close are you to retirement?)
- The amount you’ve accrued in capital gains
- The appropriate risk-return ratio for your portfolio.
Once you’ve identified a transition plan, we will move on to other considerations.
Other Issues to Consider
Your financial advisor will need to consider a lot of other issues. After all, your advisor is designing your portfolio around two objectives:
- Reflect your current needs.
- Grow your portfolio to an amount that satisfies your future needs.
Two of the biggest issues your financial advisor will want to consider at this point are whether you want to keep your legacy positions and how to implement the appropriate asset location.
How to Handle Legacy Positions
Legacy positions are assets that have been in your portfolio a long time. They tend to come with liquidity or capital gains concerns we need to work around. The most common positions we need to deal with are individual bonds and/or company stock you have held for a significant period of time.
We usually take one of two approaches in dealing with your legacy positions: they will either be excluded entirely from the portfolio (at least when we monitor your asset allocation), or they will be included in the appropriate asset class.
Whatever decision you and your advisor make, the purpose will be monitoring your asset allocation (to assign a certain amount of money to a particular investment option). For example, if you owned a short-term corporate bond, we might consider that a part of your short-term corporate bond allocation.
An Often Overlooked Consideration (That Can Have a Real Impact on Your Portfolio)
We will also implement the appropriate asset location for you. While it is often overlooked, asset location can have a real impact on your portfolio when it comes to taxes.
Where asset allocation considers how you invest, asset location considers where you invest (e.g. tax-deferred accounts or tax-exempt accounts). Its goal is to get your various investment options in the right accounts.
Asset location carries some general rules. Bonds should go in tax-deferred accounts – where you pay taxes on assets after you withdraw them – like a traditional individual retirement account (IRA) or a 401(k). Assets with higher expected returns should go in a tax-exempt account – where you pay taxes on assets before they go in the account and nothing upon withdrawal – like a Roth IRA.
These are good general rules, but asset location is a subject with many nuances. If you want to learn more, check out our article on how asset location helps your investments flourish.
After reviewing your financial situation, your advisor will often find other areas in need of attention. Every client has different needs, so it’s impossible to identify all the areas your financial advisor might need to address with you. Here are a few of the more common ones:
Seven Common Areas that Need Attention
Retirement Income – At McLean, we specialize in managing your retirement income. We can help you find ways to manage your investments make the most of your retirement using your different sources of income. Whether it is optimizing your Social Security claiming strategy, managing your portfolio distribution strategy, looking into annuities, working through your pension decisions, or helping you find creative solutions to your retirement income needs, we are here to help.
Estate planning – This one is especially important as you get older.
As a part of estate planning, you will need to consider these four items:
- Your will (what you want to see happen with your estate – including your digital assets – when you pass away),
- Your power of attorney (who you want to look after your finances when you are incapable of doing so yourself),
- Your health care proxy (who you want to make life-and-death decisions on your behalf when you are incapable of doing so yourself), and
- You’ll want to get your beneficiary designations in order to ensure your estate is handled according to your wishes.
We can help you draft and review these documents, in addition to updating them as your circumstances change.
Education planning – Perhaps you want to begin saving to help your children or grandchildren pay for college without taking on massive student loans. That’s great! But it is of utmost importance that you save money in a way that doesn’t affect your retirement. They can always take out a loan for college – you can’t take out a loan for retirement.
We can help maintain the integrity of your retirement plan while putting away money for their college.
Gifting strategies – Many people want to leave money to their heirs. However, if you have a large estate, the tax burden can be heavy — up to 40 percent.
We can help you develop a gifting strategy that minimizes the tax burden your heirs could face.
Insurance needs – Depending on your stage in life, it’s important to assess the types of insurance and the amount you need of each. Otherwise, you might be over- or under-covered.
We specialize in these types of assessments and can help you make the right decision.
Tax Strategy – All too often, people focus on minimizing their taxes for this year or next year. We don’t. Our tax minimization strategy is focused on maximizing your wealth in the long term, which can often mean tradeoffs from year to year.
We want to focus on how to help you manage those tradeoffs for the better of your entire financial situation, not just your tax hit at the end of the current year.
401(k) analysis – A 401(k) analysis can help you decide how to handle your 401(k) assets. If you are a business owner, this could include looking at the plan your company has. We can help you handle your own money in your 401(k), but we also have an in house 401(k) arm that can help your company manage the entire 401(k) plan.
The Most Important Aspect for Both You and Your Financial Advisor
Once we’ve done all this for you, we’ll be ready to finalize the transition of your assets and implementation of your portfolio. This is simply an opportunity to review everything that we have done together thus far and make sure nothing has been overlooked.
At McLean Asset Management, we have a 45-day checkup meeting with new clients for this purpose. Communication should be at the forefront between you and your financial advisor at all times.
Communication is the most important element in transitioning assets and implementing a plan. We will communicate with you frequently to discuss any issues that might come up.
After your advisor finalizes the transition of your assets and successfully implements your portfolio, we will monitor your portfolio and adjust it to fit your needs, but you shouldn’t expect to just sit on the sidelines.
Click here to download the rest of this ebook, “What to Expect as a New McLean Asset Management Client.”
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