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Goals-based planning

How much cash do you want to hold now—and why?

Sep 19, 2023

Your unique answer can be found in your values, family and goals.

Christopher Kelly, USPB Wealth Strategist Lead

 

If you hold a lot of cash, you’re likely to hear this advice: Inflation erodes the value of cash over time. There’s far greater potential for growth if you invest in stocks, bonds and private equity. If you prefer to stay liquid, there are a number of ways to make cash work harder, increasing the likelihood of delivering potential returns.

These truisms are compelling. But they don’t take into account people’s needs and goals—which should shape how much cash each one of us holds and what else we might do with our finances.   

Your best, full answer to “how much liquidity might work for me?” is likely to be different than your neighbor’s answer—even if you both have the same portfolio. What matters most is the purpose of your cash in your life, your family’s needs and your hopes for the future.   

Indeed, everyone should think through their finances with this understanding in mind. Here, we offer three case studies to provide a glimpse of how that can be done.1 

Let’s imagine there are three couples that have basic similarities: In each couple, both spouses are 50 years old; each family has two children. Every couple also has $50 million in total liquid net worth (which includes stocks, bonds and cash but excludes homes and other real assets). Of that, each couple currently has $35 million in a balanced portfolio and $15 million is in cash (30% of total liquid net worth).  

However, the couples diverge on a number of key needs and goals:

  1. The Salinas just sold their business and have a lot of short-term needs   
  2. The Wilsons are fiscally conservative and worry about disincentivizing their children     
  3. The Grants are future-focused; they want to build a legacy for their progeny and community 

Bottom line: the best course of action for each family is different—because they are. 

The sale of Salinas’s business in June 2023 will mean that they are going to face a hefty tax bill on their gains: They’ll need to pay $9 million in taxes in 2024.

It also means they can finally buy their dream vacation home. In 2025, they plan to pay $4 million to purchase a waterfront property that can serve as a retreat for the whole family.

In addition, the couple knows that they spend $1 million a year to maintain their lifestyle.2

What might work for them?

Cash
Clearly, this couple needs to keep a lot of cash on hand; so we think their current cash holdings—$15 million—is appropriate. 

However, they might consider putting their cash to work while they have it. So, for example, the $4 million they plan to use to buy their vacation home in two years might now be put into a two-year CD, bond or similarly maturing security.  

Portfolio
Our financial modeling of their $35 million in a balanced portfolio found with a high degree of confidence that they will be able to fund their lifestyle needs until both spouses reach age 90.3 There is even a good chance that the Salinas can have enough left over for a small bequest to their heirs.

Holistic plan
Selling a business for substantial profit is a major life event that should lead former owners to examine how they and their family members are now—and ideally should be—handling such essential financial services as bill pay, bookkeeping, borrowing, education for the next generation, philanthropy, property maintenance, insurance, investing, tax preparation and more.

They also should ask: Do I have structures and advisors that will help me during my lifetime? What do I want to do for my children?

Good estate planning is essential. So, too, are periodic reviews to make sure that all their plans and portfolio allocations continue to support the family’s needs and goals. 

The Wilsons spend about $750K a year to maintain their lifestyle. Their greatest concern is their children; as they put it: “We don’t want our money to take away their purpose.” As a result, their focus has not been on growing their wealth and possibly leaving their children even more. 

What course of action might work for them? 

Holistic plan
We start with the holistic plan because the first thing the Wilsons should do is consider all the ways they might understand and help their children be fiscally responsible and productive.   

It might be very helpful for them to review, with an experienced advisor, how they currently speak with their children about values and the family’s balance sheet. The couple also should examine what they are doing to teach the children about financial management and investing. 

Some of the actions the Wilsons might consider include:

  • Holding regular family meetings to discuss family finances (with or without an advisor’s assistance)
  • Establishing (or changing the terms of current) trusts for their children so that they restrict disbursements according to terms the couple thinks will support productivity    
  • Selecting a corporate trustee that will work with the children over the long term, helping them with responsible budgeting, spending and investing
  • Arranging to have whatever the Wilsons see as “excess wealth” go to charity rather than their children
  • Setting up a donor-advised fund account with their children to help teach their children financial management and the value of giving back to society  

Cash

We believe their $15 million in cash is appropriate for now—and it never needs to change.

However, we would suggest they consider putting that cash to work in short-term instruments. Once the couple is more comfortable about their children’s relationship to wealth and/or if they find a charitable cause they’d like to benefit, they might choose to reallocate some of their cash to higher risk investments with greater potential for growth.  

 

Portfolio   

Our financial modeling found that, to fund their lifestyle for the next 40 years, the Wilsons likely need only $24.5 million in a balanced account or $26.5 million in a conservative account; they do not need the full $35 million they currently have in a balanced portfolio.

In other words, if the Wilsons make no changes, they are likely to leave their children more than they originally thought. They should discuss their options with their advisors, including reducing the amount of risk in their portfolio and using the “excess” $8.5 million to $10.5 million for additional lifestyle spending, family philanthropy or other goals. 

The Grants spend $1.5 million a year to maintain their lifestyle, intend to leave their children $10 million and hope to bequeath something to charity. 

Our projections show that these aspirations are unlikely to be met given the Grants’ current holdings, allocation to cash and balanced portfolio.

What might the Grants consider doing?

Holistic plan
The Grants’ most immediate need is to make adjustments so that their finances support their goals.

Factors that the Grants should consider include:    

  • Increasing their risk—in their portfolio and with their cash  
  • Adjusting their goals—leaving less to their children and/or charity   
  • Finding other sources of liquidity—selling their vacation home and/or other real assets
  • Adjusting their lifestyle spending—reducing their annual spending  

Financial modeling of their potential options should be explored until the Grants find an approach that’s most comfortable for them. Among their choices will be to:  

  1. Achieve all goals—but reduce cash holdings from $15 million to $3 million and invest $45 million in a balanced portfolio
  2. Achieve all goals—but reduce cash holdings to $7.5 million and invest $42.5 million in a growth portfolio (with greater risk)
  3. Keep their current cash holdings and leave their children $10 million—but reduce their lifestyle spending by $400K a year
  4. Keep current cash holdings but leave their children less (or nothing at all)—and reduce their lifestyle spending by $130K a year

As different as every family is, the steps everyone should take to arrive at solid plans for personal wealth are similar:

  • Identify specific goals and general intentions
  • Model probabilities that various paths can accomplish these goals
  • Implement decisions
  • Review plans regularly to ensure current allocations are on track to meet desired goals    

Your J.P. Morgan team is available to help you and your family with every step of this process. 

1These couples are not actual clients but rather hypotheticals based on characteristics we often see.

2Adjusted upward, annually, to keep pace with inflation 

3Statement is based on a Monte Carlo analysis at the 90% confidence level using the J.P. Morgan Long-term Capital Market Assumptions. Our analysis assumes a $35 million balanced 55/45 portfolio for a 50-year-old couple residing in California for 40 years; $1 million annual spending is presumed to grow at 2.6% inflation per year.  The amount needed at the 90% confidence level for this goal is 32.5MM in a balanced portfolio, hence we consider this goal “overfunded” when using $35 million.

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All case studies are shown for illustrative purposes only, and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.

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