According to Merriam Webster, transition is defined as “a change from one state of condition to another.” Our modern lives are full of transition, different types, different reasons, different timing. The outcome greatly depends on the choices we make. This seems obvious, but do we really take the time to analyze our decisions? When we become overwhelmed by the continuous daily transitions in our lives, they become routine, and the danger is that we fail to carefully and thoughtfully “plan.” Life changing transitions like choosing a college, getting married, saving for a goal, changing careers, the sale/purchase of a business, inheritance, retirement and downsizing require in-depth planning and thoughtful decision making. The answer is not denial or avoidance, it’s engagement. The question we need to answer is this: How can we set the stage for success by identifying our goals and creating systems to help us plan in light of major life changes?
In any life changing transition, many decisions can be anticipated, and the potential impact of those choices should be considered. Take, for instance, the transition involved in receiving an inheritance. How would this affect your short-term or long-term goals? Will the legacy be large enough to become your emergency fund? Could the inheritance have a positive impact on saving for your children’s college education? Should you use the legacy to buy a second home or pay off your current mortgage? Will you be able to make a meaningful charitable bequest to the non-profit that you have passionately volunteered for all these years? Each one of these decisions may also have an impact on tax responsibility that must be considered.
Let’s examine the transition into a new job or a career change. It could present several layers of impact and intersecting, branching decisions. For instance, if your new job required you to move out-of-state, a few key points to contemplate would be the difference in the cost of living, the effect of the new state’s tax rate, and real estate pricing in your new area. The decision on how much to put down on your new home, where the down payment originates, and the structure of the mortgage you’ll obtain all have an impact on your long and short-term goals.
You must also consider the effect of the job change itself. What are the employee benefits at the new company? What employee benefits are you leaving behind that are valuable to you and your plan? How much life insurance are they providing? Is this adequate coverage for your goals? Does the new company provide short-term and long-term disability coverage? Are any of the unique benefits from the previous employer portable, such as long-term care insurance? You must carefully weigh the impact of the gains or losses in your benefits package and their impact on your financial plan.
If you are leaving a company that has a pension, what can the new firm offer as compensation, bonuses, or stock incentives to help make up for any loss of future income or benefits? How do the vesting schedule and employer matching affect your retirement savings plan? What investment choices will you make with your new 401(k)? Will the allocations and risk coincide with the rest of your portfolio? If you are over 50 years of age, is your cash flow sufficient to take advantage of the additional “age 50 catch up” contributions to your 401(k)? If you maximize your 401(k) contributions, be sure to include an income tax projection in your analysis. If you appear to be in a position for a significant refund, a change of tax withholding could be in order. This would allow additional and consistent cash flow throughout the year instead of receiving a large refund at tax time.
An often-overlooked aspect of signing up for new benefits is naming proper beneficiaries. Naming a primary and contingent beneficiary on your new employer-provided life insurance and 401(k) should be consistent with your estate planning goals and wishes. This also may be an excellent time to revisit your estate plan to make sure it is up-to-date, especially if you have moved out of state. Your documents should be applicable to the state in which you reside.
While it is impossible to mention every transition that has an impact on your life goals, we’ve covered a few examples in this post. The key takeaway is that each person is unique; wealth strategies should be individualized and tailored to meet their specific goals. Experienced professionals with skills aligned with your life transitions such as CPAs, Certified Financial Planners (CFP®) and attorneys can be an enormous asset. They can be valuable sources that can help you to make informed decisions. Ideally, these professionals should act in a fiduciary role, prioritizing the clients’ interests first. If these topics brought up questions for your specific situation, or of any of these life transitions resonate with your experience, then it’s essential to partner with a holistic wealth management and life-planning firm. To discuss your personal situation, or to answer any questions you may have on your life transitions and financial plan, please contact Sequoia today.
For more information on this topic contact Ken Paull.
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