Financial planning is misunderstood.
Ask consumers or brokers what financial planning means to them and the conversation steers toward the portfolio or a pitch for investment and insurance products.
“I asked for a financial plan – he gave me a brochure about long-term care insurance.” – Anonymous.
So, you’re considering holistic financial planning? I commend you.
Here Are The 10-Rules
Rule #1 – Take a holistic approach to every financial decision.
Money doesn’t exist in a vacuum; money is fungible.
- Consider money concerns as a circle, or a wave. There’s a ripple effect to every decision you make on every facet of your financial picture.
- Proper planning integrates every asset, liability and source of income along with your ability to save, invest, manage risk and debts.
How did you make your decision about when to take Social Security? I spoke to my – neighbor, relative, friend, the guy at Kroger’s.
Rule #2 – Be smart when it comes to household Social Security planning.
Take the emotion and politics out of your decision-making process.
- Most recipients will take Social Security early thus cutting at least 20% of lifetime benefits from them and their spouses. A majority work with financial advisors who are not trained in social security strategies.
- The goal is to maximize benefits for you and your spouse, or surviving children.
- Since Social Security may be taxable, work with you financial professional to create a coordinated portfolio withdrawal strategy.
Rule #3 – Take an objective view of your health; include healthcare costs and proper rates of inflation in your process.
According to the Kaiser Foundation, Medicare Beneficiaries spent an average of $5,460 out-of-pocket for healthcare in 2016 with some groups spending substantially more.
- Health care cost inflation can be twice the stated rate of inflation. Ignoring in your planning can be a mistake.
- Pre-Retirees can contact their insurance company to keep track of health care expenses for planning purposes.
- Retirees also must do the same and re-examine their coverage during Medicare open enrollments (which ends December 7th.)
- Average health care expenses in retirement are $220-320,000 based on annual studies.
Rule #4 – Ground your mindset in financial awareness.
If I ask you to explain your greatest financial weakness, I bet you know it off the top of your head.
- Those who maintain a money awareness and gain a “sixth sense” about spending, debt and investing are the ones with the best “plan” outcomes.
- Overspending, “Keeping Up With The Jones,’” and not saving assures poor plan outcomes.
- Outline your money philosophy in two sentences.
- Work backwards to understand how it was formed. Most likely parents and grandparents forged your money frame of reference.
- Meet with a Certified Financial Planner to help you reprogram a negative mindset and identify financial strengths.
Rule #5 – Prioritize needs, wants and wishes BEFORE beginning a comprehensive planning process.
A holistic plan needs to be based on the financial life benchmarks you seek to achieve.
- Begin with needs. They are the priorities. How much do you require for rent, mortgage, insurance, for example?
- Then, wants: The fun stuff and other expenses are secondary benchmarks to strive for. Day trips? A second home?
- Last are your wishes: GO for the gusto! List the big bucket list items. Can your plan handle them?
- The responsibility of you and your planner is to come up with a workable, personal plan that works. It’s a give and take. You must remain flexible to be successful.
- Perhaps it’ll take saving 10% more a year, downsizing, working two more years. Regardless, an action plan needs to be created, worked and monitored.
Rule #6 – Conversations, conversations, conversations!
A successful, workable financial plan must be aligned with open dialogue with people who are important to the implementation of facets of your plan.
- Utilize your financial planner to facilitate family discussions if you’re reluctant.
- Intentions must be clear when it comes to gifting and estate plans.
- Don’t allow misunderstandings to generate family tensions after you’re gone.
- Lifetime gifting strategies, especially of family heirlooms, should be based on open communication with proposed recipients to make sure the right gifts are destined for the ‘right’ people.
Rule #7 – Don’t be fooled by market averages.
A plan must include realistic rates of return for asset classes based on risk-asset valuations.
- Financial markets don’t consistently return 8% a year.
- Understand the cycle you’re retiring into.
- A realistic plan includes variability of returns, including losses, over time.
- Retirement income withdrawal plans should be ‘stress-tested’ through real-world market cycles to manage sequence of return risk.
- Income withdrawal plans should be reviewed every three years.
Rule #8 – Accountability matters.
A financial plan is the beginning, not an end. A plan is an ongoing process that requires monitoring and ‘check ins’ to make sure life benchmarks are being reached.
- A plan is NOT a loss leader. Financial services firms use ‘free plans’ to get to the good part. The part where you’re placed in expensive managed money products.
- A plan is the structure where your portfolio and investment philosophy lives and thrives.
- Long-term financial goals should be broken down to monthly objectives.
- You and your financial partner together, are responsible for meeting those objectives.
Rule #9 – Understand your Medicare options.
Studies show that most retirees will overpay for supplemental coverage or fail to understand when to begin Medicare Part A and especially Part B.
- A Kaiser Foundation study found that relatively few people have used the annual enrollment period to switch Part D prescription drug plans.
- The relatively small share of PDP enrollees who switched plans at some point between 2006 and 2010 were more likely than those who did not switch to end up in a plan that lowered their premiums.
- Nearly half (46%) of enrollees who switched plans saw their premiums fall by at least 5% the following year, compared to 8% of those who did not switch plans.
- Plans should be assessed annually during Medicare open enrollment to determine whether the current insurance fits your needs at the lowest possible premium costs.
- Tracking healthcare costs can help retirees determine how fast their costs are rising. From there, financial plans can be customized for personal healthcare inflation.
Rule #10 – A plan is never perfect.
A plan represents a human life and life rarely goes the way we expect.
- If you seek perfection, you’ll never retire or hit the benchmarks sought.
- If you embrace realistic expectations, a plan is always successful. It can be worked and fine-tuned over years.
- A financial plan is a snapshot along the road of a long and winding financial path.
- Over time, those photos no longer represent the final destination for the goals outlined.
- Twists and turns must be expected and plans revised.
If done properly, comprehensive planning can provide invaluable insight to your financial health; applaud strengths and expose weaknesses which require attention.
I hope you find these rules helpful.
For objective hourly-based planning, RIA’s deep bench of tenured Certified Financial Planners are here to partner with you.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter
Customer Relationship Summary (Form CRS)