Independent Thinking^®

Setting Priorities in a Low-Return World

The recent changes in our capital market assumptions, addressed in this issue of Independent Thinking, have a more immediate impact on our Baby Boomer clients than on subsequent generations.
 

For many of us, this is an opportunity to reconsider the relative importance of our long-term goals and ensure that we are taking care of ourselves.
 
All of us want the peace of mind that comes with knowing that we, and our surviving spouses, will not run out of money in our lifetimes. Just how much that takes is a very personal matter – some of us are content with subscriptions to our local opera company; others can’t imagine life now without private air travel – but we generally have a common interest in preserving our lifestyles.
 
Most of us consider our legacies to be an important but secondary objective. For just about everyone interested in leaving a legacy, almost regardless of the size of the estate, there will be discussions first about the need to preserve adequate assets for spending. Even in this low-growth, low-inflation environment, the expenses associated with living well, including top medical care, private schools for children and grandchildren, and housing in tony zip codes, continue to rise, often at a rate well in excess of inflation.
 
For many Baby Boomers, including even very affluent members of our generation, a 2.6% net annual spending rate won’t be sufficient to maintain our current lifestyle. Someone in this situation could choose to spend more and, in effect, annuitize their assets. For example, spending 4.5% a year of a $20 million portfolio from the age of 65 would leave $5.15 million at age 100. Spend less and the legacy is greater; spend more and it’s less. (See John Apruzzese’s article and my own CEO column on page 1 for the rationale behind this rate of return.)
 
Current estate tax exemptions, which allow a married couple to leave $10.86 million free of estate tax to their family (or as much as they desire to philanthropic causes), afford families with more than this amount access to estate planning opportunities that can help satisfy both lifestyle and legacy goals. Deciding to irrevocably transfer assets, removing them from an estate and avoiding tax on future appreciation, is one good example. But reduced growth expectations affect all of us; something may have to give, even at the most elevated asset levels.
 
Competing goals can make for interesting conversations in our offices and at our clients’ homes. Our Thoughtful Giving educational series engages couples first and then their broader families to develop and articulate realistic – and productive – expectations. We often find that each generation is more receptive to communication than the other fears. Just as parents are anxious to leave assets to the benefit of their children, children can be anxious to know that their parents are taking care of themselves.
 
Once couples and anyone else at the table realizes just what a 2.6% after-tax, after-inflation spending rate will – and won’t – buy, they can set workable goals, and spend and invest accordingly.
 
Most of our clients review their spending annually with their wealth advisor and adjust accordingly, allocating first to their and their spouses’ living expenses, and then to their family and philanthropic legacies, generally in that order. Again, it’s an individual choice, and some do make very different plans. Either way, it’s important to note that we also encourage all of our clients to set aside savings in years of excess growth to help buttress years of subpar or negative returns, helping them stay on the right course.
 
Planning in this low-growth environment, especially for Baby Boomers, is a dynamic process that needs to be based on realistic assumptions and effectively communicated. The dividend is peace of mind, which is something that we can all agree is worth the effort.
 
Jeff Maurer is the CEO of Evercore Wealth Management. He can be contacted at [email protected].