Why Matching Investments With Spending Needs Matters

There are lots of ways to lose money with investing, but perhaps the most frequent is selling assets when you don’t want to. Sometimes this is driven by fear, when economic conditions worsen or the market turns against us we naturally want safety. Sometimes we see a better opportunity or think we do, and want to make a change to take advantage of it even if the assets we own are down in value. Most often, we see this happen when there is a need for capital that we didn’t properly plan for and we need cash even if we are selling at a loss to get it.

So how do you set yourself up for success so that you aren’t selling assets when you don’t want to? You have to design your account structure and strategy to match your dollars to when you will need them. Traditional wealth management has typically problem-solved this by creating retirement-specific accounts, and anything outside of those is in a cash account. The idea is that because you don’t need the money in your retirement account until decades in the future, and have tax consequences for accessing that money earlier, it makes it easier to stay with an investment plan in that account. Anything else is likely in cash.

This approach misses anything beyond a cash reserve or tax-advantaged retirement account. What about the money you plan to use for a down payment on a vacation home in 4-5 years? What about buying a new business in 2 years? What if you make five and six-figure quarterly estimated tax payments? What about money that you want to be available as a backup if your income is disrupted for two years? Each of these issues, and many others, are missed with the traditional approach of retirement accounts plus cash. Each of these issues also becomes larger and more common as your wealth grows into seven and eight figures.

We work with our client families based on a different approach, linking the time you may need to access assets with the account structure and investment design for each. This process means that your investment strategy truly is tailored to your individual needs. Here is an example of our baseline design which involves splitting personal liquid assets into three buckets:

1. Short-term needs and reserves: spending in the next 1 year
2. Mid-term needs and reserves: spending in the next 2-3 years
3. Long-term needs: spending more than 3 years in the future

Notice that none of these talk about a specific account type such as a 401k or brokerage account. Rather, they are all focused on the time you need to access the capital. In many cases, we will create multiple accounts for the same tax type, such as a trust account, but hold different assets in each account which are tied to the time those dollars may be needed. Short-term accounts typically have cash, money market funds (which behave similarly to cash but with more interest), and perhaps individual bonds or CDs. Mid-term accounts typically hold bonds but with some stocks added to the mix for additional growth. Long-term accounts typically hold more stocks and assets like real estate as well, because the dollars are not needed for a longer time period, and assets that move up and down in price in the short term can be held until it makes sense to sell them in the future.

Let’s take a look at how this is applied to a typical client family.

The Smith Family

• Net worth is $12 million
  • $1 million of equity in their primary residence
  • $8 million of equity in a closely held business
  • $1 million of equity in a second home
  • $1 million of cash in their name at a bank
  • $500k in a SEP IRA
  • $500k in an investment portfolio held in their living trust
• Income is $1 million per year in owner benefit from the business but it varies between $500k to $1.5 million based on how the business performs in a given year
• Taxes are $350k per year
• Expenses are $400k per year
• Goals
  • Pay off the remaining $600k mortgage on the second home in 2 years with cash
  • Maintain the $1 million of personal cash in case the business hits a rough patch
  • Sell the business in 8 years and not need to generate more income past that point

Based on their goals and needs, the Smith family would likely have an investment design like this:

• Short-term: $1 million of cash moved to their brokerage account, titled in their living trust, and invested in a premium money market fund (Purpose: reserves)
• Mid-term: $500k brokerage account invested in bonds with some stocks + $250k of income net of taxes and expenses (Purpose: second home payoff in 2 years)
• Long-term: $500k SEP IRA, $8 million of business equity, $1 million of equity in the primary home, and $1 million of equity in their second home. Business equity is to be invested in stocks, real estate, and bonds after business sale (Purpose: long-term income)

With this design, they are able to generate some additional income on the short-term and mid-term buckets but will have those funds fully available for reserves if the business falters, for tax payments, and for the second home payoff in 2 years. The long-term bucket items are able to grow for an extended amount of time and endure the ups and downs of price movement without needing to be sold at a bad time. They would meet with us regularly and over time we would adjust and maintain the balances of each bucket based on changes to goals and spending.

Investing is about knowing what your goals are, mapping your capital needs to those goals over time, and then creating an investment plan that brings it all together.

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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy.

ABOUT JARROD

Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.