The Frankenplan is representative of a lot of people’s financial lives. It is made up of many different parts, acquired at different times for sometimes the wrong reasons and it is not very coordinated. It’s easy to fall into the Frankenplan trap. Let’s take Charles for example. Perhaps he bought a life insurance policy many years ago right after getting married because that’s what you’re supposed to do, right? Then he purchased another shortly after your first child was born. He has a 401(k) at each of his last two jobs in addition to his current one. Charles bought a little bit of stock from the broker who wouldn’t stop calling him and has an E-Trade account in which he purchased a stock after a hot tip from his brother. He has another account somewhere but isn’t sure if it’s an IRA or something else. He’s not sure because he hasn’t opened those statements in years. He has a mortgage but can’t remember the interest rate or term and isn’t quite sure how many years are remaining, he only knows the monthly payment. He has a disability policy that the premium is drafted from his bank account or is that a long-term care policy, maybe it’s even a cancer policy? Unfortunately, Charles has a Frankenplan. As a creature of his own making, Charles has the ability to put the Frankenplan out of existence and get a real plan together.
What makes up a real plan for Charles or anyone else for that matter? A real plan brings together a coordinated summary of a financial life including both income and estate tax planning, risk management, spending plans and investment plans. The first step in developing a financial plan is determining where you are now. This includes preparing a summary of your assets, liabilities and your net worth. In simpler terms, a listing of what you own and what you owe, the difference being your net worth.
This summary of where you stand is the starting place of the plan. The next step is determining where you want to go. As Yogi Berra once said, “If you don’t know where you are going, you might end up someplace else.” Where you are going is your goals: which are unique to each individual or couple but generally revolve around certain standard desires such as assisting in college funding for children or grandchildren, a retirement that maintains or exceeds the standard of living as when working, a second home or traveling. As a couple, it is important to establish goals together, as you don’t want surprises down the road. For example, if one person’s plan for retirement is to stay home, read books and relax, while their significant other’s plan is to travel extensively, it’s better to work it out now instead of Day One of retirement.
The next steps are to take each area and make sure you are on the right track. Are you minimizing the amount of tax you pay? Tax planning is not a one year issue, a true financial plan will look at several years. It is difficult to do that with the state of things in Washington but that’s another story for another time; right now we deal with what we have. Sometimes it even makes sense to pay tax earlier than normal; as an example, many people retire and are proud they are in a very low tax bracket but then when their required minimum distributions kick in it moves them into a much higher bracket. Proper tax planning over a number of years can look into options to smooth the income and take advantage of some of the lower rates. While estate planning is still relevant for some people, it is at the mercy of Washington and can change just as the tax code does. Does your plan make sure you are covered for any potential exposure to estate tax?
Are your investments on track to achieve your goals? Are they too aggressive or too conservative? Will a market downturn at the wrong time sidetrack your goals or will you never reach them because of perceived risk of the stock market? Proper allocation and annual rebalancing are the keys to achieving your goals, whatever they may be. Having your accounts coordinated can assist with retirement planning as well as tax planning. Making sure your after accounts are tax efficient and low cost can add to returns that over time can help reduce the amount of time to achieve your goals.
Are you properly sheltered against possible risks? Risks of an early death or disability, risk of lawsuits, risks to your home, automobiles or boats are common things to consider. Reviewing your policies allows you to determine if you are adequately insured, over or under insured. It also gives the ability to determine whether you can save money by changing your deductible.
Do you have a spending plan that makes sure you are living below your means and saving enough? A review of your monthly expenditures and comparison to your monthly income makes sure that you are on the right track to reach your goals and not run off a cliff.
These are just a few of the items that are involved in a financial plan. All the pieces are connected and there for a reason; coordinated and working together. A planner can help you put all the pieces together to make it happen and then guide you as the plan needs tweaking. It is important to have a planner who can assist you with all aspects of the plan so you don’t end up with another Frankenplan.
~ Bryon Gragg, CPA/PFS