“Comprehensive Financial Planning.” Almost every financial company offers this, but what does it mean? “Financial Planning” can mean sending you a basic risk survey. Maybe it means a 30 page “financial plan” document. There’s a big difference between that and an advisor that digs deep into your estate plan and finds ways for you to save tens of thousands of dollars in taxes. Proper planning brings clarity to your financial life. It removes confusion. In this post, we’ll dive deeper into what encompasses an excellent financial plan.
For decades, the main value proposition of a financial advisor has centered around investments. The focus has been an idea that a financial advisor is going to get you a better return on your money than all of the other advisors and companies out there. The advisor, so it goes, has a magical ability to pick the right stocks or funds at the right time to give you a peaceful growth trajectory in the markets. Thankfully, there is now an enormous amount of academic research and evidence that this is all bunk.
Not to mention, if the primary service your advisor offers you is selecting and managing your investments, that’s not good enough. Give me a call, and I’ll show you how to get that for almost nothing. Academic evidence strongly shows that paying next to nothing for your investments is a fantastic idea. The odds are overwhelmingly in your favor that you will beat a more expensive portfolio.
Simply put, the reason you hire a Financial Planner is to enhance your decision making.
You may or may not be a business owner. Even if you are a W2 employee, you’re still the CEO of You, Inc. Generally speaking, You, Inc. stands an excellent chance of living longer than 90 years. And if you’re like most of the clients I work with, you have family and friends and your world extends far beyond yourself. Getting the right answers to the most critical questions around money will not just give you peace of mind or help you today. It can magnify your family’s financial trajectory for decades.
Your financial plan should encompass a sound strategy in a handful of areas. Let’s dive in.
Your tax return is a largely retrospective activity. You’re looking to the prior year and assessing what happened in the past. Tax planning is the opposite. We look forward. We ask how you can keep as much of your assets as the tax code allows.
One of the first steps is to analyze your current tax situation. Understanding what you’re currently paying and what you’re on track to pay in taxes over the next 10-30+ years gives us a benchmark. From that benchmark, we can analyze several scenarios to alter that outcome. The goal here is a plan that helps you pay far less in taxes over the coming decades than you otherwise would.
Financial Planners place a big emphasis on the idea of compound interest. I love compound interest. However, compound interest can become a negative force for you in two ways-the fees you pay inside of your investments and taxes. Let’s work to get both of them in your favor.
When you hear the words “estate plan,” you typically think that’s for someone who is 90 years old and has an enormous estate. Truthfully, everyone needs an estate plan. Yours could be as simple as a will or trust along with health care directives and power of attorney. Making the right decisions here means you direct where your assets will go (and how) when and if something happens to you.
There’s another aspect to estate planning that is often missed. I call it “practical estate planning.” Practical estate planning involves tangible actions that you can take. Actions to ensure that if something does happen to you, you’ve set your spouse or children up for success.
One last critical step: communicating all of this to your family in the right way. We can all think of an inheritance that has destroyed relationships. Making the right decisions helps guard your family against that pain.
For as much as insurance has been misused by whole life or annuity salesman, it can be argued that insurance is the foundation of financial planning. Building enduring wealth starts with defending you and your family against significant financial threats.
Making the right decisions here means ensuring that you’re secure in the event of death, disability, or disaster to any of your assets (auto, home, umbrella, etc). But it doesn’t stop there. It also means avoiding overly-expensive insurance and unnecessary annuities-and knowing how to get out of them if you’re already in them.
Retirement, College, and Life Planning
Retirement planning aims to answer two questions. First, exactly how much do you need to stop working? Then, how do you give yourself a monthly stream of income from that savings without running the risk that you’ll be out of money in 10-20 years?
College planning ensures that we make proper provisions in the most tax-efficient way for those we look out for. It also means doing so without putting your well-being at risk.
I expect life planning to become a central focus over the coming decades and one that will largely replace retirement planning. Why? Our modern version of retirement isn’t overly feasible moving forward. Pensions and Social Security are built for societies that mostly pass away before reaching age 80. Many people laugh when I say this, but if you’re reading this and you’re in your 50’s, you have an excellent chance at reaching 95+.
If you’re under 45 today, you may have a different path than your parents. The idea of constantly working for 35 years and then not working at all for the next 35 will begin to disappear. Proper tax and income planning will be critical for the next generation of retirees.
If the other aspects of financial planning above are a workout regimen, proper investment planning is like taking a steroid with that workout regimen. Making sound decisions with your investments involves an in-depth analysis of where you’re currently positioned and where you should be positioned.
Making sound decisions in investing means you stay away from chasing performance or flashy strategies that will never be able to deliver what they promise. It means picking an evidence-based portfolio, maintaining it properly, and sticking with it for decades. Read more about our investment philosophy here.
The reason I cover each of those areas is the same reason the CFP® board includes them-they’re all very interconnected. You cannot make investment decisions without impacting your current or future tax bill. You cannot plan for your future without including insurance and estate planning. Making sound decisions in each of these areas turns your money from a stressful concern to a tool that gives you the life you want.