Wealth Planning

A wealth plan connects a family's goals to the resources that will fund them. This module builds goals-based plans by valuing each goal and assigning it the risk it can bear, extends the client's balance sheet to include human capital, pensions and the cost of future spending, shows why plans must be stated in after-tax terms, and sets out how much liquidity a family needs and where it should come from. The calculations are simple; the judgement lies in ranking goals and matching risk to them.

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What you will learn

1. Formulate a goals-based financial plan by prioritising and valuing a client's goals, calculating discretionary wealth and recommending strategies to achieve the goals.

Rank goals from needs to wants to wishes and aspirations; each gets its own horizon and required probability of success.
Value each goal as a present value, discounting at the return achievable with the required confidence: higher confidence means a lower rate and more capital.
Discretionary wealth = total assets - present value of all goals.
Negative discretionary wealth means saving more, delaying or cutting lower-priority goals, or accepting lower confidence on aspirations.
Goal sub-portfolios fit mental accounting; check that the aggregate allocation remains sensible.

2. Recommend ways to manage a family's financial exposures across its life cycle and into retirement, using an economic balance sheet that includes human capital, pension wealth and the present value of future consumption.

Economic balance sheet: add human capital and pension wealth to assets, and the present value of consumption and goals to liabilities.
Human capital = present value of expected after-tax earnings, discounted at the risk-free rate plus an occupational risk premium.
Bond-like human capital supports more equity in the financial portfolio; equity-like or market-correlated human capital calls for more bonds.
Key lifetime exposures: earnings, premature death, health, property and liability, longevity and sequence-of-returns risk.
Manage them with insurance, reserves, diversification away from the employer, annuities, bond ladders and flexible spending rules.

3. Evaluate how income, capital gains, wealth and transfer taxes affect goals-based and holistic financial plans, including stating assets and spending needs on an after-tax basis.

Income, capital gains, wealth, transfer and consumption taxes all affect a plan; rules differ by jurisdiction and change over time.
After-tax value of a taxable account = MV - t_cg (MV - basis); of a tax-deferred account = MV (1 - t_w); a tax-exempt account counts in full.
Spending S funded from a source taxed at t needs a gross withdrawal of S / (1 - t).
Taxes affect withdrawal order, asset location, timing of gains, gifting and residence decisions.
Stress-test plans for tax changes and do not let tax treatment override risk and return.

4. Recommend liquidity strategies that support a financial plan, including the size of a liquidity reserve, the sources of liquidity and the management of illiquid holdings.

Liquidity needs: ongoing (spending gap), emergency, planned (tuition, taxes, capital calls) and opportunistic.
Reserve = n years of (spending - reliable income) + emergency amount + planned outflows, held in cash and short-term bonds.
Refill the reserve from the long-term portfolio in good markets so growth assets are not sold after a fall.
Credit lines are a backup, not a substitute: lenders can cut lines or raise margins in a crisis.
Map capital calls, lock-ups and gates on illiquid holdings, and beware funds with a liquidity mismatch.

Module at a glance

Goals-based planning ranks goals from needs to aspirations and funds each with a sub-portfolio matched to its horizon and required confidence.
Discount each goal at the return achievable with the required confidence; discretionary wealth = assets - PV of goals.
The economic balance sheet adds human capital and pension wealth to assets and the PV of consumption and goals to liabilities.
Human capital = PV of earnings at the risk-free rate plus an occupational premium; equity-like human capital calls for a more conservative portfolio.
State assets after tax: taxable accounts net of tax on unrealised gains, tax-deferred accounts times (1 - withdrawal tax rate); gross up spending as S / (1 - t).
Reserve = n years of net withdrawals + emergency amount + planned outflows; credit is a backup, not a substitute.
Sequence risk peaks around retirement; bond ladders, annuities and flexible spending rules manage it together with longevity risk.

This free module has 4 lessons, 16 practice questions with full explanations and 1 essay case with a model answer.

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