Planning for a Liquidity Event

by Beck Bode Beck Bode | July 14, 2022

With an influx of cash - whether from retirement or the sale of an asset like a business you may suddenly be faced with big financial decisions. These decisions also often come with complexity and a new level of tax consideration. Where should you begin? Your financial planner can help you learn more about the following steps.

What Is a Liquidity Event?

A liquidity event occurs when the value of an asset that was previously inaccessible (illiquid) - such as a home or business or retirement account-  becomes available as cash.

Liquidity Event Scenarios

You could experience a liquidity event if you:

  • Sold a company
  • Inherited or were gifted money
  • Sold a second home or property and don’t plan on buying another one
  • Cashed out on your 401(k)
  • Retired
  • Received a sports team sign-on bonus or high-value contract

While some of these scenarios are ones that you would know are coming, others aren't. Although retirement is a common — and foreseen — liquidity event, it’s one that gets mishandled all the time which can be devastating because you don’t get a second chance at retirement planning.

Regardless of the details behind the event, one fact remains: if you don’t plan ahead, you may not make the most of the opportunity to secure your future. 

This was true in 2008 and 2009 when the financial markets overall were way down, real estate was down,  and many people who retired or otherwise had a liquidity event did not make the appropriate investment decisions because they didn’t know what to do. Many people, fearful of market volatility, timidly went for safer options, like keeping their money in federally insured vehicles, like CDs, for example,  that had a much lower payoff in the long run. We want you to make more informed and better decisions for your future. 

The Importance of Timely Planning for a Liquidity Event

Tax Considerations for a Liquidity Event

Sudden inflows of cash come with tax implications. Seeking the help of a financial advisor and tax and legal counsel, even, to address tax considerations is vital to avoiding headaches down the road.

Beware of Inflation - The “Silent Killer”

If you plan on saving the proceeds of your liquidity event, you have to beware of inflation, which we call the ‘silent killer’ of growth. Any investment you make must be able to outpace the rate of inflation, otherwise, you will lose buying power. It’s tempting to want to “sit out a market” or perhaps to put off doing something with your sudden influx of cash. But there is a cost to it. Say a million dollars comes into your checking account, and it’s not invested in something that's beating inflation, then over a 10-year time, even if you don’t spend a dime of it, at a 3% average annual clip of inflation your money would only be worth roughly 700,000 In terms of buying power. That kind of loss is devastating.Dancing with the Analysts

Planning for Long-Term Financial Success

One of the best ways you can ensure the long-term success of your financial future is to have a plan. So many people invest without actually having an objective. You need to save toward something, and a properly developed financial plan is composed of very specific goals. 

Have a Goal

Like everything in life, it’s easier to plan if you know what you want. 

Here are the questions to consider when planning for a liquidity event:

  • What kind of a lifestyle will I want to live and how much will it cost?
  • Do I want to work? What do I want my career to look like after the transaction? 
  • How can I transfer wealth to my children and grandchildren?
  • What are my estate or philanthropic goals?
  • How should I invest my money?

The answers to these questions often vary by situation, but they can help you make the best decisions for your future. For example, if a young person - say 18 or 19 year old- inherited $4 million, they could be satisfied just coasting along in life and they may even be fine... However, a conservative measurement of a good investment could see that same $4 million becoming $32 million once the individual t has reached 48 years old. At that point, they could really make a dramatic impact with their money. 

So, once you have a goal, have done a bit of research, and know what you want, it’s time to seek out your experts.

Assemble a Team of Trusted Advisors

It’s a good move to have an experienced financial advisor you can trust. A really smart move is to have more than one advisor with different areas of expertise: a tax professional, a CPA and an attorney are all great additions to your advisory team. 

Choosing a Financial Professional

Choosing a financial professional to help you define your goals and objectives, create a plan, and define suitable investments to power your plan is a s a crucial step to optimizing your financial resources. In fact, it’s the most important step when it comes to planning for a liquidity event like retirement or the sale of a business. 

When you pick your financial advisor, make sure you’ve done your homework. Partnering with the right one can help reduce your financial stress and give you confidence and security today and into the future.

Liquidity Event Planning Should Start Now

If you’ve experienced a liquidity event, it’s time to get some help. At Beck Bode, it all starts with having a plan. 

Schedule a Discovery Call to get started on planning for your future.

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