contributed by Nathan Gehring
In my role as a financial planner, I get reminded of an important lesson time and time again. My role is to help people make good financial decisions. Generally, when I’m preparing analysis, this role leads me down the path of analysis that would help a client retain or create the most wealth possible. And yet, so often, the right decision isn’t about the money. Or perhaps more accurately, money is only a part of the decision.
A Place to Live
I’m reminded of this most frequently when helping people consider where they would like to live. As cross-border planners, helping clients decide their state of residency is a common question. And frequently one of the first destinations brought up is California. Ocean, sand, sun, mountains, the lifestyle and warm winters draw lots of people to California. However, California comes with a variety of financial costs.
The California tax system is one of the most expensive in the entire United States. Income taxes are very high and the California Franchise Tax Board (the department responsible for California income tax) has a reputation as being extremely aggressive. In many parts of the state, the cost of living is higher than much of the United States. Real estate is very expensive in many desirable destinations. Financially, California often just doesn’t make sense.
However, frequently California remains the correct decision for clients. It’s the lifestyle they desire. It’s the location where they want to spend the rest of their lives. Simply put, it’s what they want!
What’s a Financial Planner to Do?
So, what’s my role as a financial planner when the most prudent financial decision isn’t necessarily the correct decision for a client? How do I advise a client when location and lifestyle trump financial cost? I do what I always try to do, help the client make an informed and well-considered decision.
First, I look to help them understand what that extra cost actually is. We discuss the cost of living and taxation in California versus elsewhere, another similar state, Florida perhaps. Quantify that cost and show how that cost bears out over the long-term. Then I help the client understand whether they have the financial capability to bear that additional cost or not. If they do, I would finish with a simple question: is that desired lifestyle worth the additional cost? If a client choose to accept the cost in return for the lifestyle they desire and has the ability to do so, this has to be viewed as the correct decision even if not the most financially prudent one. And sometimes, the client decides the cost is too high and looks to take up permanent residency in another state. In this event, it still should be viewed as the correct decision, even if lifestyle needs to be adjusted.
Not Just Where to Live
This dynamic manifests all over in a financial planning relationship, not just residency. Giving up control of assets in order to potentially reduce estate taxes is another example. Electing less portfolio risk to sleep better at night even though it may mean a lower standard of living is another. At almost every turn, lifestyle and financial prudence collide. Understanding the cost of that lifestyle long-term and making an informed and well-considered decision is what I hope to help my clients make, even when the financially correct decision loses.