Modern financial markets are highly complex and subject to significant volatility. Combine this with the ever-rising cost of living reflected in higher prices for things like food, education, and healthcare, and it’s clear that financial planning is more important than ever when it comes to achieving your financial goals.
When engaging in financial planning, the large number of variables involved can be intimidating. The various aspects of the planning process often include:
- Income projections
- Expense analysis
- Savings plans
- Insurance and estate planning
- Retirement planning
- Investment portfolio analysis
While these and other elements of financial planning can be considered separately, without regard to other parts of your plan, the danger of doing this is that unanticipated expenses, income shortfalls or other setbacks that occur in one area of your finances can make it difficult to achieve your objectives in other areas.
The solution to this dilemma is to avoid planning for individual goals in isolation; a better strategy is to consider how your financial situation as a whole, including your current and projected income and expenses and other objectives, impacts your individual goals and vice versa.
Taking this type of comprehensive approach to financial planning can help you achieve your financial goals by avoiding the trap of making plans that look good on their own but are subject to disruption and failure when considered as part of the bigger picture.
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As the phrase suggests, comprehensive financial planning refers to an approach that takes into account your overall financial situation. Rather than looking at your ability to set aside funds for retirement, your insurance coverage, monthly cash flow, or any other financial metric in isolation, comprehensive financial planning considers all of these factors together to provide you with a more accurate assessment of your ability to reach your financial goals.
An example can help illustrate why: imagine that you consistently set aside funds for retirement over a period of 20 years or more, only to find that you needed to use those funds instead to pay for your child’s higher education.
While education funding is certainly an important priority for many people, so is funding your retirement plan. In this example, your plans for retirement would most likely need to be seriously re-evaluated after using the bulk of your retirement savings to pay for schooling.
With a comprehensive approach to financial planning, you can avoid these types of situations by considering all relevant factors when making your financial plans. For instance, in the above example, an alternative approach would be to set up a separate college fund at the same time you begin saving for retirement, thereby providing yourself with a more realistic picture of exactly how much you can afford to save for retirement.
This more realistic figure, in turn, might lead you to look for ways to cut costs to set aside further funds for retirement, or at least to more accurately estimate the type of lifestyle you would be able to afford in retirement. If cutting costs alone would not enable you to save sufficient funds to meet your retirement funding goal, you might consider contributing less to education as a way to free up additional funds.
There are many other examples that could be cited of the benefits to be derived from comprehensive financial planning. For instance, your savings plans could be derailed if you suffered an injury without being covered by disability insurance. Especially for people in high-risk jobs, pricing such insurance is important so that you can analyze whether purchasing income protection of this type is worthwhile in your particular situation.
Another potential setback comprehensive planning can help you avoid could involve dealing with a temporary need for cash that arises due to an emergency. If no planning for this type of situation is undertaken, it could cause you to have to sell illiquid assets at a low price or pay penalties for raiding your retirement funds early to generate cash. If you plan for the possibility of an event of this type, however, you can avoid such a scenario by setting aside emergency savings to handle such situations when and if they occur. Generally, it’s advisable to have 3-9 months’ worth of living expenses readily available for an emergency reserve.
By providing you with a big picture view of your overall financial position and the interrelationships between the different elements of your financial life, comprehensive financial planning can improve your ability to make realistic financial plans, monitor their progress, and achieve your financial goals.
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When building a financial plan, there are a variety of areas to focus on. Each of these areas should be carefully examined to determine how they apply to your personal financial situation and how you can best manage them.
The main components of a financial plan typically include:
Modern financial markets can be extremely volatile, meaning that a well-thought-out strategy is vital to selecting investments that can deliver the performance necessary to help you achieve your financial goals. Diversification is a key component of most long-term investing strategies because it tends to reduce portfolio volatility, allowing you to take advantage of the stock market’s tendency to deliver long-term results without taking the risk of putting all your eggs in one basket.
When selecting stocks, bonds, and other assets for your investment portfolio, it’s important to consider factors such as your risk tolerance, investment goals, and time horizon. Generally, the longer you have to achieve a goal – for example, saving for retirement – the greater the allocation to equity (stock market) investments a financial advisor is likely to recommend.
The portfolio review is a crucial part of the process of implementing your investment strategy. Unless you have a good handle on the composition of your portfolio and where it falls on the risk, diversification, and growth potential spectrum, it’s hard to evaluate your ability to reach your financial goals.
When conducting a financial review, you and your financial advisor should consider whether your portfolio is optimally constructed to help you meet your financial objectives. As an example, say retirement is 20 years away. It may be optimal to invest your retirement savings for growth instead of current income. By the same token, if you are retired and count on your investment portfolio for daily expenses, you may not want to invest aggressively. An excessive amount of equities in your portfolio can expose you to too market risk, which may jeopardize the income stream you rely on. In either case, a portfolio review allows you to realize these situations. You can evaluate your current allocation, make any necessary changes, and align your investments with your goals and financial circumstances.
We encourage you to consult with a financial advisor for portfolio reviews. Advisors are well-versed in portfolio construction. An advisor will not only help you settle on an appropriate risk tolerance but will also help select the most appropriate securities for your investment. It can be confusing to determine if any given stock, mutual fund, ETF, or other product is best for your situation – and financial advisors can handle the leg work for you.
The engine supplying the power (funds) that will enable you to achieve your financial goals is cash flow. Budgeting is key to maximizing the cash flow available to you both for current spending and setting aside savings for future goals. Trying to reach your financial goals without a budget is similar to driving with your eyes closed. While it may not be as physically dangerous, it can be just as catastrophic to your finances. Without a budget, you are subject to spending more than you make, or misjudging the amount of funds you can save for future objectives.
While drawing up a budget doesn’t necessarily mean that you will always meet your planned income and expenditure levels, it does give you the ability to proactively plan your financial life. With a budget, you can realistically appraise how likely you are to be able to meet your financial objectives given your current financial situation. You can then use this data to make any changes necessary to improve your chances of reaching these goals.
For instance, you could cut expenditures to free up further cash flow for funding goals such as saving for retirement or paying for a child’s education. Alternatively, you could reevaluate your savings plan and reduce the amount you save for such goals if your financial situation no longer supported setting such amounts aside.
Besides the satisfaction of donating to a worthy cause, charitable giving can also provide tax benefits to those making such contributions. In your financial planning, it is important to track any and all charitable giving you engage in to ensure that you receive the maximum tax benefit possible from these donations. For higher net worth individuals, it may be worth considering more advanced charitable planning to help with your tax situation. It’s important to share any charitable desires you have with your financial planners so they can help strategize an efficient giving program.
Deciding on a Social Security claiming strategy is a crucial part of the overall financial planning process. While the amount you receive from Social Security rises if you wait for a number of years after you are first eligible to receive benefits, waiting until this point to begin receiving Social Security payments is not always the optimal strategy. Your claiming strategy becomes more complicated when a spouse is involved, and coordinating spousal benefits is very important. Social security claiming strategies are not always straightforward, and it often requires consultation with a financial advisor to help you choose the strategy which best fits your financial situation.
When it comes to leaving a legacy for your heirs, many people use a trust or trusts as part of their estate planning strategy. Assets contained within a trust avoid the probate process, offering greater privacy than a will. Trusts can also help ease administrative hassles and expenses that your beneficiaries may otherwise encounter after your passing. The use of a trust also gives you more control over how your assets are distributed after you are gone, whether in the form of clauses specifying conditions for asset distribution or by the appointment of a trustee or guardian to oversee their distribution.
Taking into consideration your tax situation is an extremely important part of the financial planning process. Given the big bite taxes take out of an individual’s or couple’s income, reducing your taxes as much as possible is a logical step to take. An experienced financial advisor can help you analyze your financial situation to determine what steps you can take to keep the amount you pay in taxes as low as possible.
Some strategies for keeping your tax bill low include:
- Invest in municipal bonds
- Make contributions to retirement plans such as 401ks and IRAs
- Start your own business to write off work-related expenses
- Utilize any applicable tax credits
- Target long-term capital gains
Capital needs analysis
While companies commonly perform a capital needs analysis to determine how much capital they will need to fund company objectives, this process can be equally as valuable for individuals and couples. Performing a capital needs analysis can help you by specifying the amount of money you will need to achieve specific financial goals.
This is especially helpful for long-term goals such as retirement or funding a child’s college education. If you know the amount of capital you need to accrue, you can calculate how much you need to set aside in savings and what type of returns those savings need to earn to meet that goal. By allowing you to plan more precisely, this type of analysis is vital to increasing your chances of being able to meet your long-term financial objectives.
Insurance coverage can provide the peace of mind of knowing that you and your loved ones are protected financially in case of an unanticipated event. Disability coverage, for example, can provide continuing income in case you are unable to work due to an accident. Life insurance protects your dependents by providing funding to replace your income. Health insurance, whether self-funded or employer-funded, protects you from the risk that medical costs seriously impede your chances of reaching your financial goals. An insurance analysis is designed to calculate your financial risks in these areas and to estimate how much insurance would be necessary to cover those risks.
Advanced financial planning software can help plan for retirement by analyzing how likely you are to reach your desired retirement savings amount given your current savings/investing strategy. The use of a Monte Carlo simulation takes into account a wide variety of historical data to perform these calculations. This type of “stress testing” considers whether you are likely to meet your objectives in the event of a market crash, prolonged recession, etc.
By using such projections, you and your advisor receive valuable input about your chances of achieving your retirement savings objectives. If the analysis shows that there is a lower chance of reaching your goals than you are comfortable with, you can make adjustments to your approach to boost your likelihood of achieving them; such changes could include contributing more to your retirement accounts or altering your investment strategy.
As is true with many retirement planning options, it can be complicated and confusing to interpret reports. As well, inputs need to be accurate in order to provide reliable outputs. As such, we highly recommend using a retirement planning professional to conduct this analysis.
Ideally, your asset allocation should reflect your time horizon (ie: when do I need this money?) as well as your risk tolerance (ie: how much risk to I want to take with my investments?).
Growth investors typically have a long investment time horizon and can tolerate volatility in their portfolios. If that does not sound like you, you may wish to take a more conservative approach as you approach your golden years. Reducing equity exposure is often suggested as a means of reducing volatility. The logic behind this approach is easy to understand – when you are near or in retirement, there is less time for your investments to recover if the market drops. Because of this, it may be more prudent to adopt a conservative investment strategy.
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Peace of mind is perhaps the most important emotional benefit of financial planning. While a financial plan does not guarantee success, it provides you with the reassurance that you are taking concrete action to reach your financial goals. This can reduce the anxiety that often comes with thinking about money issues.
Lack of a financial plan can generate anxiety – you may feel uncertainty about your financial situation and prospects. If you’re feeling doubtful about the achievability of your financial goals, it’s likely a sign that a financial plan is warranted. Removing or reducing doubt can increase your confidence that you are on the right path.
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You may feel scared that an advisor will tell you that you “can’t” do something you may desire in retirement. What often happens is that you work with an advisor to strike a compromise. As an example – maybe you’re unable to retire immediately and purchase a vacation home. A compromise could be that you work for an extra year or two, or take on part-time work for several years of your retirement, or purchase a less expensive vacation home.
Benefits of working with a CERTIFIED FINANCIAL PLANNER™ Professional
While there are a number of tools available on the internet for analyzing your finances and making investments, performing these tasks without the relevant expertise or experience can produce less-than-satisfactory results. Life can be complicated, and the internet does not always provide the best answers to your unique life situation. If you would like assistance in performing these important functions, there are significant benefits to working with a CERTIFIED FINANCIAL PLANNER™ Professional.
This financial designation is one of the most, if not the most, comprehensive designations available to financial planners. In addition to demonstrating professional experience as a financial planner, to earn the designation a planner must study for and pass a rigorous test that covers all major aspects of the financial planning process. These include:
- General principles of financial planning
- Education planning
- Insurance planning
- Investment planning
- Tax planning
- Retirement savings and income planning
- Estate planning
CERTIFIED FINANCIAL PLANNER™ Professionals must adhere to the CFP® Board’s strict ethical standards for conducting business. “CFP Board’s Code of Ethics and Standards of Conduct requires CFP® professionals to uphold the principles of integrity, objectivity, competence, fairness and confidentiality. They make a commitment to put their clients’ interests first at all times when providing financial advice.” (1)
Additionally, to maintain their knowledge base, CERTIFIED FINANCIAL PLANNER™ Professionals are subject to continuing education requirements that help them stay on top of the latest practices and policies for offering financial advice.
To find a financial advisor in Libertyville IL, look for an individual or firm with the ability to handle the full spectrum of financial planning needs. This means they should be able to offer you the full menu of financial planning services including plan creation and implementation.
Ask an advisor if they can help you with the following:
- Plan creation
- Tax analysis
- Retirement planning
- Portfolio review
- Investment management
- Capital needs analysis
- Insurance analysis
- Trust and Estate planning
You should also check to see if an advisor will continue to monitor your plan after it has been implemented. Changes in financial market conditions or in your personal financial situation may require adjustments to your plan. Look for an advisor who is prepared to assist you with any such changes as needed.
It is also important to look for an advisor with the proper qualifications to offer you comprehensive financial advice. In this regard, selecting an advisor with the CERTIFIED FINANCIAL PLANNER™ Professional designation offers the assurance that your advisor is qualified to provide you with assistance across a wide range of financial issues. The high ethical standards required of this designation provides another compelling reason for selecting this type of financial advisor.
Comprehensive financial planning can help you successfully negotiate tumultuous financial markets and a topsy-turvy economy. Whether you decide to perform the steps necessary to take this approach yourself or decide to work with a financial advisor, creating a financial plan that takes into account all relevant aspects of your financial situation can both improve your chances of achieving your financial objectives and reduce the stress associated with making financial decisions.
These two benefits of comprehensive financial planning, the ability to help you handle complex financial situations, and the peace of mind the approach provides, constitute compelling reasons to make this planning method your go-to approach when it comes to drawing up plans to reach your financial goals.
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- CFP® Board CFP Board’s Code of Ethics and Standards of Conduct https://www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct
Prism Planning Partners, LLC dba Prism Planning Partners is a Registered Investment Adviser. This article was produced by Paladin Digital Marketing, an entity unrelated to Prism Planning Partners and may not necessarily reflect the expertise of this financial advisor. This publication is not intended to provide investment advice and is intended for your information only. Opinions and forward-looking statements expressed are subject to change without notice. Information based upon third-party sources and data are believed to be accurate and reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All domestic and international rights are reserved. No part of this publication including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prism Planning Partners. Neither Prism Planning Partners, nor its investment advisor representatives provide legal or tax advice. Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.