Financial planning has come a long way over the years due to academic research and technology. From improved accuracy to real-time updates, planning is much more advanced and reliable as a road map than it once was.
Having a solid financial plan in midlife is likely the most important lever at your disposal for improving your financial life. Going through an in-depth planning process can have a major impact, way above and beyond how your investment portfolio might perform.
It may be fun and exciting to take a road trip with no plan in place and see how things unfold. But it’s not a good idea to leave your financial future to chance! We can’t predict the future, but we can certainly better prepare for it.
Real financial planning is about more than just money. It incorporates your life goals with your financial goals. What can your money do for you? How can it help you attain and sustain the lifestyle you want over time?
Real financial planning gives context to your money.
I believe that you should go through a detailed financial planning process once a year when you’re in midlife at a minimum. Your life changes and evolves, and even small changes can have a big impact over time.
It’s also a good idea to update your financial plan when you’re going through a major life event such as a new marriage or divorce, retirement, career or job change, and death of a spouse or parent.
In this podcast episode, I also walk through what a good financial plan should include.
Here’s What a Good Financial Plan Should Include:
1)Personal balance sheet
Otherwise known as a ‘net worth statement’, a balance sheet is a detailed view of all of your assets and liabilities. It can help show your progress from year to year, how your assets are classified, and even potential tax traps that may be lurking.
2)Cash flow analysis
A cash flow analysis is helpful for identifying all of your inflows and outflows over time. With this type of analysis you have the ability to see how various income sources, savings, and spending can impact your life goals.
Many times, tax planning can be the biggest differentiator in your entire financial picture. Good tax planning looks at how to minimize your taxes and prioritize your savings in order to take advantage of tax deductions.
Retirement is easily one of the biggest decisions you will ever experience. A good financial plan will answer the questions of when you can retire, how much income you’ll need, how various income sources will supplement your retirement (like Social Security), identify unexpected costs (like healthcare), and how long your money will last.
Good retirement planning should also take into account the impact of your retirement timing, inflation, and longevity risks.
Healthcare is one of the largest retirement expenses that you will face. It is a big misconception that Medicare will cover all of your healthcare needs and expenses once you turn 65. That is just not true.
One study estimates healthcare will cost as much as $285,000 per couple, and that does not include long-term care!
As women, our healthcare expenses are even higher given that we typically live longer than men.
A good financial plan looks realistically at what healthcare and long-term care will potentially cost in addition to Medicare benefits.
We pay for insurance on our homes and automobiles. In the event of the unthinkable, or to care for your family, income and asset protection is a critical part of a good financial plan.
It is possible that you could be overinsured or underinsured in midlife. In many cases this is the time we are in our peak earning years, which makes having disability and life protection important.
Investment planning is where many financial advisors begin and end with their clients. Investment planning is only ONE component of a good financial plan.
Your investment portfolio should be aligned with your actual life and financial goals! I find that this is not the case quite often.
Getting your risk comfort level and asset allocation mix right is most important in determining your investment experience. Also, making sure you are not paying too much in investment expenses and fees when there are plenty of high quality low cost options available. (these are not advisory fees but typically are hidden within each investment vehicle that you own)
I’ve seen portfolios with hidden investment expenses from 1% to 3%, which is on top of financial planner and advisory fees.
Having a high quality, appropriately allocated investment portfolio that performs the way it should when aligned with your goals should not be expensive nor difficult.
Your investment performance at the end of the day is going to depend on your behavior and how well you’re able to stick with the strategy!
In summary, if you haven’t been through an in-depth planning process, haven’t updated your financial plan in awhile, or you work with an advisor who doesn’t focus on financial planning, it may be time for an update!
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