A Comprehensive Framework for Financial Planning: Strategy
If you read and acted on my prior two commentaries discussing offense and defense, you may now be thinking “Well, I’ve been busy implementing ideas and I think I’m good”. After all, I accurately measured my risk tolerance, adjusted my investments to match, maxed out my 401k contribution, made my banker sad by taking my cash to buy and rent out a condominium, engaged a qualified attorney to update my estate plan, donated some low basis, high value stock to charity, audited my homeowners and car insurance, and bought more life insurance for myself and my spouse. If that describes you, that’s AWESOME and CONGRATULATIONS on making smart decisions! Take a little time to relax and reward yourself for investing in the financial well-being of yourself and your family. When you are done, I have another important question for you…what’s your game plan?
More specifically, have you set identifiable financial goals and created a plan to achieve them? Do you know how much money you need to save, for how long, at what rate of return, and under what tax consequences it will take to be able to retire with confidence and not worry about running out of money? If you plan to fund education expenses for your kids or grandkids, what might that cost, how much do you need to save/invest, and into what type of account(s) should you direct the money? Hopefully you built appropriate diversification into your invested assets, but have you thought about tax diversification? Have you consulted with a tax planner (hint, this person is likely not the same person as your tax preparer) to review your tax return and strategize how to minimize your tax liability and avoid an unpleasant stay at the Crossbar Hotel?
If all this sounds overwhelming, fear not! I’ve done this for thousands of families over my 27 years of advising and it’s rather simple if you know where to start and take it one step at a time.
Step one is to put a stake in the ground and mark where you are today. We use state of the art financial planning software that uses facts regarding what you own, how you own it, what you owe, what you earn, what you spend, what you save, what you may inherit, what entitlements you have (think Social Security), what insurances you have, and what your goals are to determine how well positioned you are to achieve those goals if you maintain the status quo.
Step two is to determine where opportunities for improvement lie. We use tax planning software that incorporates AI to make observations and suggestions to reduce taxable income by creating larger deductions. For self employed people, adjusting your W2 income and retirement plan contributions to optimize your Qualified Business Income (QBI) deduction is low hanging fruit.
The concept of tax diversification relates to accumulating wealth in various instruments that have differing tax treatment. When you retire, if all the money you have saved for retirement is in your 401k, you probably won’t like that every dollar you withdraw to buy groceries will be taxed as ordinary income. You would do well to fund instruments like Roth accounts and permanent life insurance which are both tax deferred and accessible without income tax. Doing so puts you in control of how much tax you pay to your least favorite uncle to access your money.
Are you saving enough, in the right kinds of accounts? Do you have large account balances in low yielding accounts like bank savings while simultaneously making payments on loans with high interest rates? If you are doing this, your banker should be taking you out to a nice dinner at least monthly. If that sounds obvious, good for you, and I agree! You might be surprised to learn how some of the most intelligent and successful people I have worked with do this for years until someone (like me) sits them down and explains it in detail.
Is your estate plan up to date? Are the people with important roles in your plan (Executor, Trustee, Guardians) still in your good graces? Have you really spent time thinking through who should get what and when, or did you mostly abdicate thought and tell your attorney to just split it equally amongst your children? That strategy may work well if your estate is 100% cash and securities, but if your assets are lumpy and consist of things like your home, a vacation home, and the family business in which one of your kids works and the other two do not, you have just created a recipe to make your kids hate each other. Please, please, spend the time making your desires crystal clear so the people cleaning up the mess know exactly what you wanted.
Do you have adequate amounts, and the appropriate types, of insurance. What happens if you get disabled and can’t work ever again? What happens if you get run over by the proverbial bus (maybe it’s self-driving)? How do you cover expenses for a long-term care event (home health care need, assisted living or skilled nursing facility stay)? Is your home insured for its replacement value and not just what your real estate buddy says it’s worth? None of these scenarios are pleasant, but properly analyzing them and thoughtfully preparing for the possibility can mean the difference between temporary distress and tragic, unrecoverable disaster.
Step three is to do scenario analysis to find the optimal combination of strategies to give you the best outcome with the highest degree of certainty and least amount of risk. Modern financial planning software makes this easy with a skilled operator. The impact of changes to one or multiple variables at a time display in real time on your screen, making it easy to optimize results.
Step four is to implement your optimized plan. You can do this on your own if you are so inclined, or you can choose to work with a fiduciary advisor who will implement it for you. Just remember, a good plan that actually gets implemented is far superior to a perfect plan that never gets done.
Step five is to periodically review (I suggest annually or whenever a major life change occurs) your plan because things will most definitely change. Tax law will change. Rules on retirement plans will change. Your goals will change. Your relationships will change. How you make a living and what you earn will likely change. Your health may well change. Adjusting your plan to incorporate change over time will keep you on course to achieve your goals. See the nearby quote from Ray Dalio, one of our all-time favorites here at Elevate.
I strongly recommend you either hire a competent, trustworthy advisor (I know a good one😊) who will facilitate this process for you, or make an appointment with yourself at least once a year to do it. Trust me when I tell you that not doing so will be very costly.
So, there you have it. Offense, defense, and strategy. Do an excellent job of all three and you will give yourself the best chance of succeeding, at least financially, in this crazy world in which we live. Thanks for taking the time to read this. May God bless you richly.
Ken Armstrong, CFP®, RICP®, ChFC®, CLU®, CASL®, CLTC
CEO & Senior Wealth Management Advisor
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.
