United States: Improve Your Estate And Financial Planning With An Integrated Life Cycle Perspective

Last Updated: January 31 2015

While we're still near the "New Year's Zone", I want to suggest a resolution for clients and their advisors: think about your estate and financial planning in an integrated way, from a life cycle perspective.

People often analyze their lives in segments, even though they're living them as a unitary whole. It's valuable to keep in mind how these segments relate. Consider the diagram below:

The Life Cycle Estate and Financial Planning Quadrant has four domains: Facts, Forecasts, Life Stages, and Unexpected Events.

Facts are empirically observable data, things you can measure.

Examples of personal Facts include your age, current health, balance sheet, and income statement. Other Facts can be impersonal, including sovereign credit ratings, the tax code, and geopolitical issues.

Personal Facts are susceptible to change and improvement; impersonal Facts generally aren't.

Measuring Facts accurately and tracking them consistently improves the quality of planning results.

Forecasts are predictions. Although in retrospect they will prove to be more or less accurate, when made, forecasts are necessarily subject to uncertainty.

Some Forecasts are personal, such as your life expectancy, or whether a career choice will make you happy.

Others, such as those about economic growth and future asset class returns, are impersonal.

Forecasts can be a hybrid – your assessment of how impersonal forces will affect you, personally. Hybrid Forecasts include those for your income growth, how long you will work, and the asset allocation that will best balance your need for return against aversion to risk.

Life Stages often follow a predictable path. (Shakespeare said this far more eloquently in As You Like It.)

Not everyone lives through all possible Life Stages, but these often include single early adulthood, getting married, buying a house, having children, establishing a career, saving for children's college, meeting needs of an aging parent, preparing for retirement, thriving in retirement, and transferring wealth in late old age.

A subset of Life Stages are those in the workforce, and could include any or all of entrepreneurship, changing jobs, moving, receiving and managing equity-based compensation, and selling a business.

In some instances, Unexpected Events may not be entirely unforeseeable, but they remain unpredictable. As above, some Unexpected Events are impersonal, such as the burst of a bubble, sovereign default, or natural disaster.

Many Unexpected Events, however, feel quite personal. Examples include the birth of a special needs child, divorce and/or remarriage, job loss, sudden wealth through an IPO or lottery win, disability, a need for long term care, or untimely death.

Unexpected Events often shift someone out of one Life Stage into another in an sudden way, and for this reason they're substantial risk factors in clients' planning.

Different professions have traditionally emphasized clients' needs in one of the four domains in the Quadrant.

  • Accountants excel at measuring and reporting clients' Facts.
  • Financial advisors devote tremendous effort to Forecasting economy-level and company-level performance, and consequences for clients' portfolio returns.
  • Estate planning attorneys spent most of their time advising clients in the wealth transfer Life Stage.
  • Insurance agents matched clients with policies mitigating exposure to Unexpected Events.

One challenge with this "clustering" of advisors by domain has been that clients' goals or problems are almost never limited to only one domain.

Quite to the contrary, clients' lives are lived in an integrated way, in all domains at the same time, subject to ongoing change and challenge within each domain.

Clients will save a tremendous amount of time, energy, friction, and fees if they are able to clearly self-assess any given situation in light of current conditions in their own individual life cycle estate and financial planning Quadrant.

Advisors who bring the Quadrant's integrated perspective to bear will likely add more value, do better work, and have more fun.

This is the first of what I expect will be an intensive series of posts that explore, explain, and apply an integrated approach to life cycle estate and financial planning. This mind map branches far and wide, but the Quadrant and its four domains lie at the core.

Image above: Nicolas Poussin (1594-1665) A Dance to the Music of Time, Wallace Collection, London. Credit Wikimedia Commons.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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