June 27, 2012
Liquidity in Retirement
In the new FINRA Suitability Rule, effective July 9, 2012, the generally held definition of liquidity is as follows: Liquidity is the extent to which a customer desires the ability or has financial obligations that dictate the need to convert quickly and easily to cash all or a portion of an investment without experiencing significant loss in value.
With this in mind, we pick apart the definition and how this applies to individuals seeking liquidity guidelines when developing their asset allocation strategy. The statement “… has financial obligations that dictate the need to quickly and easily convert to cash…without experiencing significant loss in value” is what most financial professionals focus on. This is where the time-tested recommendation of having an emergency account (i.e.: liquidity) containing 3-6 months of income is derived from. The theory is that a cash reserve of this amount can offset the unexpected loss of income, thus bridging the gap between gainful employments. While this strategy is highly regarded, yet not often practiced, we now look toward the future and beyond employment to retirement.
Why does the modern retiree need liquidity, and more importantly, how much liquidity is recommended in today’s current economic conditions? The dollar amount tends to stay the same as suggested before retirement (3-6 month of income), but the “why” is what is sought after. Working with pre-retirees and retirees over the past three decades, here is my Top Ten Reasons to have liquidity in retirement:
- Lack of available loans due to not being gainfully employed
- Major household purchases
- Major household maintenance expenses
- Supplement retirement income when inflation erodes purchasing power
- Dividend, Rental or Interest income replacement (all subject to change)
- Major healthcare expenses
- Family emergencies
- Avoiding ordinary income tax on qualified plan distributions for emergency needs
- Possible unfavorable market performance when cash is required
- And the number one reason to have liquidity in retirement is for the one emergency never planned for.
Kimberly Enders CFP® CWS©
CERTIFIED FINANCIAL PLANNER™ Professional
Enders Wealth Management
38700 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
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