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It Doesn't Have To End in October!

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October is Financial Planning Month

This is the time of year when most of us reflect on how we are doing with the goals we set in January.  Hopefully, you have a few completed goals checked off!  Were there any financial goals on your list?  Did you make a written financial plan to accomplish them?

According to the 2021 Schwab Modern Wealth Survey, a mere 33% of Americans reported having a financial plan in writing.   A significant portion of individuals who do not have a plan cited various reasons for their lack of planning. Specifically, 42% mentioned financial constraints as the primary obstacle, while 19% claimed to be too occupied with other commitments to allocate time for planning. Additionally, 22% expressed that the process of creating a plan seemed overly complex to them.   I can certainly understand all of these reasons, but it is easy to get started!  Focus on one aspect of the planning process and continue to make improvements until you are ready for the next step.  Keep it simple!   Everyone can benefit from a financial plan. 

What exactly is Financial Planning?

Financial planning involves analyzing your complete financial situation and devising strategies to accomplish both your immediate and future objectives.   As one of my new clients recently said, financial planning helps to organize her financial jungle!

What does my financial plan include?

In general, there are two types of financial planning, comprehensive and limited scope.  A comprehensive plan is more thorough and addresses most aspects of the client's financial life.  A limited-scope plan will usually cover one or two planning areas.  Typical planning areas include:

1. Establishing your financial goals/cash flow planning.  Create a comprehensive inventory of your assets and liabilities.   Take a close look at your budget to assess your spending and saving habits. Do you have an emergency account?  Take care of this key step first as it serves as the foundation of your plan.  Next, determine your objectives.   What do you and your family really value?  This will help guide you with your goals in saving for retirement, home remodeling, or charitable giving. Make sure you account for inflation as it erodes the value of your spending power over time. (Think about how much cars have increased in the past 5 years!)  If you're nearing retirement, will your investments be enough to support you for the rest of your life, taking into consideration the impact of inflation?   It's essential to ensure you have enough financial resources to sustain yourself throughout retirement, avoiding the need to return to work.

2. Social Security.   It is crucial to carefully consider when to begin receiving Social Security benefits, as it can serve as a significant source of retirement income.   One option is to start receiving Social Security benefits at age 62, although the amount you would receive would be lower.  Consider delaying it up to age 70 to potentially increase your benefits significantly.   As an illustration, the amount of your Social Security benefits will grow by 8% each year if you choose to postpone receiving them from the age of full retirement to age 70.   Throughout your lifetime, you have the potential to accumulate a substantial amount of money in benefits.   If you collaborate with a financial advisor, consider requesting a Social Security analysis from them. This analysis can help you determine the optimal time to begin receiving your benefits.

3.  Insurance Planning.   Including insurance in your financial plan is essential.   Will there be a financial hardship if your spouse passes away?   If so, consider purchasing life insurance.   If you are worried about the possibility of getting injured and being unable to work for an extended period, it may be worth considering disability insurance.   If you have teenage drivers, it may be wise to consider getting a personal umbrella policy.   Statistics show that the likelihood of car accidents is higher among teenage drivers compared to their older counterparts.   In the event of an accident involving multiple individuals, it is possible that your auto insurance might not offer sufficient medical coverage.   An umbrella policy offers extra coverage that goes beyond what your auto policy covers.   Also, consider how you will fund any potential long-term care expenses in the future.  Will you self-fund or would a long-term care insurance policy be more economical?

4.  Estate Planning.   Estate planning is an important aspect that should be included in a well-rounded financial plan.   Estate planning involves determining how you wish for your estate to be managed once you have passed away.   One way to ensure the smooth transfer of your assets is by designating specific individuals to inherit them.   Another aspect of estate planning involves designating someone to manage your financial and medical matters in the event that you are unable to do so.   These tasks can be accomplished by utilizing a financial power of attorney and health care power of attorney document.   In the event that a trusted loved one is unable to provide these documents, there is a possibility that the court may intervene to determine who will be responsible for managing your financial matters and making medical decisions on your behalf.   Consulting with a qualified estate planning attorney is urgent so that your assets are allocated correctly to your beneficiaries and to establish the necessary estate planning documents. 

5.  Investment Analysis and Planning.  Reviewing your investments once a year is not financial planning!  However, it is a vital component of financial planning since your investments will fund some of your future retirement spending.  Understand the investments you own and the risks associated with each investment - there is no free lunch! Make sure that your accounts are diversified and that you can stick with your choices in all types of markets. Finally, evaluate management fees to make sure they are reasonable and that they don't exceed industry averages. 

6.  Retirement Planning.  This component is perhaps the most complex of all of the pieces of the financial planning puzzle.  It is critical to estimate the amount of money you will require for retirement and develop a strategy to achieve that goal.  Consider your desired retirement age, lifestyle, pension income, expected tax bracket, and expected inflation.  If you are using an online calculator, make sure that you understand the assumptions being used and that the assumptions are reasonable.  

7.  Tax Planning.  By effectively managing your taxes, you can optimize your wealth and possibly pay less taxes over the course of your lifetime.  There will most likely be a few tax years that you will be in a lower bracket.  Do you know which year this will be?  If you are married, do you know what your tax bracket will be once your spouse passes away?  For most clients, it is normally higher.   Knowing the answers to these questions can help you plan ahead, save money, increase cash flow, and make smart tax moves. 

As you can see, money touches every aspect of our lives, and everyone wants to make smart financial decisions.  By taking the time to plan and address these areas, you can be one step ahead of where you were previously, and this one step can get you closer to your goals! The topics above are just a brief list of what may be covered in a financial plan.  Although your financial plan serves as a compass to make sure you are going in the right direction, a financial plan is not one-and-done. Your plan must be reviewed and updated regularly as income, assets, taxes, and goals change.  If you need help with any aspect of your financial plan, please reach out to us or any qualified Fee-Only CFP®

**Michelle Vargas, CFP®,  is a Fee-Only Fiduciary Financial Advisor serving clients in Fort Worth, Texas, and virtually nationwide.  She enjoys helping clients manage their wealth so they will have their important concerns addressed and resolved.  She works in a Fiduciary capacity and receives no sales or commission-related compensation.

This content is developed from sources believed to be providing accurate information and is for educational purposes. It may not be used for the purpose of avoiding any federal tax penalties. Please consult your financial, legal, or tax professional for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.