Amid continuing market volatility, many investors feel uneasy about their financial security. One way to help clients regain a sense of control is to help them focus on the side of their balance sheet that they can influence the most-their liabilities. As advisors, we often do Monte Carlo-type simulations for assets, but tend to spend less time forecasting different scenarios for liabilities. We have little control over asset prices, but we have significant control in helping clients manage their goals, costs, expenses and debt. By conducting a thorough liability review with clients, you can build stronger client relationships and truly differentiate yourself from other advisors.

Three Levels Of Liabilities
Every current expense or future goal creates a liability, and all liabilities should be matched against an asset. Liabilities equal all current expenses and future financial goals, while assets equal all available funding sources, as well as any hard assets or existing portfolios. At Monument Wealth Management, our clients have found it extremely helpful when we break down these assets and liabilities across three broad classifications in our financial planning process-these classifications create a three-level triangle divided into survival, lifestyle and legacy. (See Figure 1.)
Survival liabilities represent a client's basic needs: food, shelter, transportation and health care. As a result, survival liabilities tend to be relatively fixed and non-negotiable.
Lifestyle liabilities may include things that clients want, but don't necessarily need, such as a new car every two years or an annual trip to Europe. Lifestyle liabilities are more negotiable than survival liabilities.
Legacy liabilities include things that clients would like to leave to future generations, like a gift to their alma mater or the transfer of real property to children or grandchildren. Legacy liabilities tend to be extremely negotiable.
Three Case Studies
Here are some real-life stories of how we've helped clients manage liabilities. The names have been changed to protect our clients' privacy, but their stories reflect real-life challenges our clients face and solutions that we've helped to implement.

Stan-Creating A Contingency Plan
Still working, but planning for the future
Stan, age 56, works for a large, multinational technology company as a software engineer. He plans to work for at least ten more years, but understands that layoffs within his industry are a natural part of the business cycle and could impact his job security at some point. What's more, because of his age and level of experience, he worries that if he's laid off it may take him longer to find a new job than a younger worker with a smaller salary.
Stan's job is the asset that pays for his current survival liabilities-things like the mortgage payment, food, utilities and insurance. We recently worked out a wealth management plan for Stan that includes a contingency or backup plan in case he loses his job. The goal of the backup plan is to keep emotion from guiding his decisions at a stressful time.
One component we've added to Stan's financial plan is a fixed annuity, which provides a guaranteed income stream that he can turn on or off at any time. While fixed annuities have higher expenses than other investment strategies, the fixed annuity represents only a small portion of Stan's overall portfolio and he likes the guaranteed income component.
Another step we've taken is creating a step-by-step plan that would kick in if he becomes unemployed. Stan says that having a plan in place has really alleviated much of his anxiety around his job situation. He feels that he is being more proactive in managing his future finances and now sleeps much better at night.

Action Steps:
Minimize current expenses
Identify different forms of insurance and strategies that can help ease the impact of unemployment
Identify assets in an investment portfolio or savings account to be used in case of job loss
Prioritize future liabilities now, so there's a plan in place to account for them in the event of unemployment

Mary-Paring Back Lifestyle Spending
Small cuts now mean the potential for more future income
Mary, age 60, wants to retire at age 65 and withdraw $2,500 per month over the rest of her life. This future goal is actually a liability, because withdrawing $2,500 each month will require an asset to pay that bill during retirement. Building up that asset over time creates a future liability.
Mary is close to achieving her goal now, but could still benefit from making catch-up contributions to her IRA and 401(k) plan. In addition, it's probably a good idea for Mary to start gradually making small reductions in her spending habits today so it's less of a shock when she begins to live on less income in retirement.
To help Mary adjust her lifestyle spending, we asked her to list her five biggest discretionary expenses today and rank them to find out which she would be willing to cut back first. At the top of the list is an annual trip to Italy that Mary makes every year with friends that costs her about $7,500. While she's already booked the trip for this year, she's willing to forgo Italy next year in favor of a shorter domestic trip to help save money.
In addition to helping Mary review her lifestyle expenses, we've also reviewed her asset allocation, managing the risk in assets that will be used for liquidity in the early years of retirement. Because we have helped Mary make a gradual shift in her lifestyle spending and managed risk in some parts of her portfolio, she now feels more in control of her retirement plan.

Action Steps:
Separate needs from wants
Prioritize lifestyle spending
Shift cash from lifestyle spending to survival liabilities

Don-Increasing His Financial Legacy
Balancing multiple priorities
Don, age 50, would like to retire at 65, gift $1 million in cash to his alma mater and leave the family beach house free and clear to his adult children within a well-established trust and estate plan at his death. Each of these goals creates future liabilities.
Using conservative Monte Carlo simulations based on Don's current assets and savings rate, we project that Don could likely achieve both goals fairly easily, assuming that he doesn't encounter any unusual circumstances, such as high unreimbursed medical expenses in retirement or an unplanned family emergency.
While we've created a sound retirement plan for Don with his specific legacy goals in mind, we encourage him to think of his legacy goals as being highly negotiable over time. Should he face a goal shortfall at any point in the future, he can reconsider and reprioritize his goals. For example, he could pay off the beach house first, and then perhaps reduce the amount he leaves to his alma mater.
Because Don's estate is very large, we recommended a life insurance policy to help cover estate taxes. This way, his adult children won't have to liquidate the house to pay the tax and they will have the most options for occupying, renting or selling the house, according to their personal preferences at the time. Estate taxes are a future liability and the life insurance policy is the asset that pays for the liability.
Action Steps
Plan for the estate tax
Prioritize legacy goals in case you can't fund them all
Encourage clients to stay flexible and evaluate legacy goals once a year

In Your Own Practice
As financial advisors, we are in a unique position to help our clients plan for the future. These case studies simply illustrate that liabilities are an important part of the financial planning process for all investors. Furthermore, not all liabilities are created equal. By helping your clients identify, prioritize and manage their liabilities, you will put them in a better position to potentially achieve their goals, while helping yourself build stronger client relationships.

David B. Armstrong, CFA, is the lead investment manager and portfolio manager at Monument Wealth Management, as well as a co-founder of the firm.