Comprehensive financial planning is a holistic process that looks at all elements and stages of your life and aims to create a financial plan to carry you from today through the rest of your life, and even beyond. It involves more than just investment management – although that is a key component of any financial plan.
With comprehensive financial planning, we look at all aspects of your life and goals, from your cashflow today to your retirement and estate plan. We consider how taxes will shape your finances today, tomorrow and for your heirs, and use your personal goals and unique situation to determine the right strategy for you.
In this guide, we’ll take a closer look at the core components of comprehensive financial planning, including retirement planning and financial independence, tax planning, special considerations for business owners, estate planning and investment management.
Like a Rubik’s Cube, each component in a comprehensive financial plan is connected to the next. Every twist can scramble your plan as a whole. One thing you do can affect several areas of your plan.
Read on to learn more about each of these elements of a financial plan.
Retirement planning is the process of determining your retirement goals and how much income you’ll need to achieve them, then creating a financial plan to help you reach those goals. It helps you determine how to save and invest your money today so you can live the retirement you dream of.
A core component of your retirement plan is determining when you want to retire. This used to be an easy question to answer: You’d retire whenever your pension kicked in. Now that pensions are few and far between, workers need to rely on their own savings to provide retirement income. This has changed the retirement planning process and landscape. Now, instead of waiting for your pension, you can retire whenever you become financially independent.
Financial independence is when your savings and investments generate enough income that you no longer need to work. Technically, you can retire whenever you become financially independent – be that 65, 55 or 45. To become financially independent at any age though, you need to make saving a priority.
Retirement planning and financial independence is not about how much you earn; it’s about how much you save. While more income makes it easier to save more in theory, this is only true if you don’t also spend more. Someone earning $100,000 per year who saves only 10 percent of his or her income would have a longer road to retirement than someone who makes $70,000 but saves 50 percent of that income.
To help you stay on track with your savings goals, keep visceral, “important to you” goals. The more you value your long-term goals, the easier it’ll be to save your money for the future rather than spend it today.
Another great way to help you save more is to automate your savings process. Set up automatic transfers from your checking account to your savings or investment account so that you don’t have to manually move the money every time you get a paycheck. This takes the question of how much to save each month off the table. If you can automate your savings, then saving money becomes the default, and keeps it a priority.
Maximizing your savings isn’t about how much you make either; it’s about how much you keep, and you only get to keep what the IRS doesn’t take in taxes. When looking at your financial plan, it’s important to do so from a tax-planning perspective.
Tax planning puts a tax lens on your financial plan. It looks at your after-tax income and portfolio returns and aims to find ways to maximize your tax efficiency. For instance, a tax plan could help you decide if you should use a Traditional IRA or Roth IRA. It might tell you to put your taxable bond fund in your IRA or to use a municipal bond fund in your non-retirement account. Tax planning can also help you decide where to withdraw your money from in retirement to help ensure more of your savings stay in your pocketbook.
The goal of tax planning should be to minimize taxes not just today but throughout your entire life. This may mean paying more taxes this year, such as using a Roth instead of Traditional IRA, in favor of having to pay less taxes later on. But forward-looking, multi-year tax planning is rare. You are just playing a different game if you’re trying to reduce taxes this year versus looking at the rest of your life and trying to reduce taxes over the next few decades. Roth conversions are extremely powerful at reducing life-long taxes if used during “gap” years (the years between retirement and Social Security).
Comprehensive financial planning is not a one-size-fits-all process. The considerations and strategies used are as unique as the individuals they are designed for. This is particularly true for business owners, who have very different goals from traditional employees.
For instance, your goal may be to maximize your income and grow your net worth. Or maybe you’d rather focus on maximizing your time so you can spend more time doing what you love with the people you love. Is leaving a legacy important to you? If so, do you need to spend time focusing on how to maintain family harmony when you do?
As a business owner, you can’t determine the best financial planning strategy for you until you prioritize your goals. What matters most to you?
Your priorities will also help you determine your business exit plan, which all business owners should have. Your exit plan details how and when you’ll hand over the reins of your business. Will you leave it to your heirs or sell it to insiders or outsiders? Do you see yourself stepping down all at once or stepping away slowly throughout retirement? Even if you don’t plan to relinquish control for many years to come, you should start thinking about your exit plan sooner rather than later, as this will play a key component in your retirement plan.
As you think about your exit structure and retirement plan, calculate your gap. This is the difference between the liquid capital you have and the after-tax amount you need from your business to live the retirement you want. Once you know your gap, you can plan ways to fill it, be that through other sources of retirement income or increasing the liquid capital in your business.
Estate planning is an aspect of comprehensive financial planning that can be easy to put off but also devastating if you do. Estate planning is about protecting your assets for your children’s lifetimes using a proverbial “vault.” This vault can shelter your assets from threats such as divorce, creditors, liability and even your own mismanagement. Without a proper estate plan, you lose the ability to dictate how your assets are bequeathed upon your death and put your heirs at risk of paying hefty estate taxes or having to go through the extensive probate process.
Changes do creep up, but that’s why building flexibility is key. Estate planning is not a set-it-and-forget-it process. You should revisit your estate plan regularly, especially if new laws come up or your personal situation changes.
While comprehensive financial planning is much more than just investment management, you can’t ignore the importance of having a strong investment strategy. The single most important element of any investment strategy is that it be one you can stick with through all market environments – something that can be easier said than done. All investment strategies bar non have “performance droughts,” and if you don’t have conviction in what you’re doing, you’ll change strategies at the worst time. The night is often darkest before the dawn.
For investors, the greatest challenge to long-term success is our own behavior. Benjamin Graham, Warren Buffett’s mentor, said it best when he said, “The fault, dear investor, is not in our stars – and not in our stocks – but in ourselves.” Too often, investors try to time the market or panic and sell when the tide appears to turn against them without realizing that today’s volatility has little impact on their long-term results.
To be successful at investing, you need to be invested for the long haul. In investing, the night is often right before the dawn. If you can’t stick with your strategy when it goes against you, you don’t have a workable strategy.