Do Your Clients Have Enough Liquidity?

Liquid assets are a major component of a healthy financial plan. Are you making sure your clients have the cash they need to hedge against disasters?

Income shocks produced as a result of the pandemic have had a somewhat purifying effect on financial planning. Before COVID-19, many consumers were dismissive of the idea that strong portfolios need to contain substantial amounts of cash. However, with the COVID-19 lockdowns, most Americans now comprehend the critical role of liquid assets in surviving the unexpected.

Accumulating emergency funds is now a topic of conversation for working families. Advisors and agents can play a pivotal role in assisting their clients in setting emergency fund goals and executing those goals, even in a negative-interest-rate environment.

The "Six Months" Rule Is Changing.

The pandemic has turned the usual "save three to six months of living expenses" on its head. In the future, advisors must help clients set aside emergency funds based on proximity to retirement, the variability of earnings, employment status, and the number of people in their household.

Because they did not customize their emergency plans to their unique situations, many Americans found their savings quickly depleted as the lockdowns dragged on. For example, gig and contract workers are more at risk for lengthy work interruptions than permanent workers. Thus, advisors may want to encourage them to build more considerable emergency funds than the current benchmark.

Similarly, highly-paid workers or those with specialized careers probably need more extensive cash reserves. When these workers are laid off, it generally takes them much longer to find a replacement position. Households with two or more earners may get by with less in their emergency funds, especially if they work in different careers. It's much less likely that all earners will encounter job loss at once.

Get Your Clients' Cash Out of the Coffee Can.

Advisors must also help clients determine the best place for storing emergency money. Often nonretirement brokerage accounts are used as a holding place for short-term cash needs. But there are other useful and creative storage options for cash.

These include:

1. Roth IRAs: Younger clients might benefit from using a Roth IRA to hold their contingency funds. In the event of a crisis, the contributions into a Roth can be accessed without penalties.

2. Permanent Life Insurance: Strategically designed whole life and other permanent life insurance types can be excellent places for parking emergency funds. An advantage of this strategy is that there is the possibility of receiving modest gains on the cash and liquidity, and control of funds.

3. Health Savings Accounts. Besides their use to pay for medical expenses, HSAs can also serve as retirement or investment accounts. Your clients who are 65 or older can use funds they've accumulated in an HSA for non-medical expenditures, without penalties. For 2021, contributions to HSAs are $3,600 for individual-only coverage and $7,200 for family coverage.

4. Certificates of Deposit and Money Market Accounts: These remain the go-to choice for those worried about losing even a penny of their money. Unfortunately, with the Fed maintaining historically low interest rates for the near future, money put into these accounts will experience little to no growth.

5. Annuities: Several insurance companies allow annuity owners to withdraw as much as 10% of the account's value without incurring a surrender charge. Some contracts also waive surrender charges for terminal illnesses or confinement to a nursing home. Annuities could be a solution for specific clients, especially those near retirement who have a low tolerance for riskier investments.

Clearly, the COVID-19 pandemic has had significant repercussions for our economy.

The pandemic's fallout continues to change how advisors assist their clients in the planning process, especially emergency plan design. Persistently high levels of unemployment, economic volatility, and uncertainty about the future mean that you must have efficient ways to plan for life's inevitable emergencies.

Del Fujinaka is a family business planner and cash flow coach at Hoku Legacy Solutions LLC in Honolulu.