Mo Vidwans
Every family strives to achieve success with their financial plan. Just like a house needs a solid foundation or a successful entrepreneurial idea needs a sound business plan, achieving success with your financial plan needs a solid foundation of four pillars. A complete financial plan will provide you with integration of Retirement Planning, Estate Planning, Investment Management and Tax Planning. Not only these four pillars need to be understood well, initially, as to why we need them but also they need to be further developed to reap full benefit for the rest of your life and your heirs. It needs ongoing commitment from you and your family, and your Financial Planner, otherwise it can quickly lose its relevance and impact.
Retirement planning
Retirement covers a wide spectrum of time and scope because you are working at it all your life. It is important to consider your financial future and achieving your desired lifestyle whether you are already retired or working towards that. For those who are still working you have to seriously consider how much of the current income that you use to support your family’s lifestyle would you need in retirement. About 30 years ago I would get an answer of about 70% (it used to be about 50% in fifties and sixties) but today that answer is 100%. Nobody wants to sacrifice anything, even in retirement. If that is the desire then we will have to prepare ourselves by ensuring that such an income stream would be available. For sure it means more savings (more sacrifices) now. Planning will definitely get you to the key answers. Will I have enough to retire? Will I be able to do the things I wish to do? Will my savings last for my lifetime?
For those who have already retired, such planning will help you put into perspective your income stream and expense stream and hence your withdrawal rate from your savings. “Will it last me for the rest of the years left” is one of the key questions to be answered.
Such planning for retirement is a continuous process but there has to be a beginning, a goal set-up and a path clearly defined. Otherwise we tend to flounder in the darkness of our own ignorance and float along aimlessly. There is an old saying that says, “if you fail to plan, you plan to fail.”
Estate planning
This facet is a key pillar in your planning. Not only it tells you what kind of assets you should be accumulating but it also structures how the transfer of assets to the next generation will take place. Currently each individual can have up to $5.49 million assets before the federal estate taxes set in but Congress is known to change these laws quite often. Because of the high level of exemption for estate taxes, a common misconception is that there is not much need to consider estate planning. Wrong. If you have something of value that you wish to pass on or someone you would like to protect more than others then estate planning is of value to you; and still there are many other compelling reasons.
The exigency of estate planning would be to have the Will package which includes a will, power of attorney, health power of attorney and few other documents. Without this package you are leaving all the decisions to the State in which you live and State rules may not be something that you will like. Not only do you have to make all your wishes about every thing known and documented but you also have to select the right people to conclude your work for you when you are gone.
A testamentary trust, which comes into effect upon the death of the settlor, may present you with distinct benefits.
Investment management
Knowing your future goals and long-term financial objectives can shape your personalized investment strategy. Either doing it yourself or by working closely with your certified financial planner, you can build an investment portfolio custom-tailored to your specific goals without the need to take on unnecessary risk.
It, of course, helps if you start working towards your goal earlier in your life. It helps in two ways: it gives you more time to grow your assets and gives much room to recover from errors.
I have discussed in this forum in the past about different ways your assets can be invested. With a long-term goal in mind and depending on your risk tolerance, there are literally scores of avenues that can be pursued with satisfactory results. You just need to have a plan, a strategy to follow and patience not to derail yourself.
Tax planning
Tax planning is much integrated and associated deeply with everything I have mentioned above; tax planning should not be done in isolation. The objective is by no means just to avoid taxes but to minimize them following the rules and the laws in place. Key issue here is that we must be thinking taxes over many years (this becomes really pertinent in your sixties and later years) and not just somehow finishing the filing every year. Tax smart investing strategies can improve net investment returns, minimize taxes and save investors money.
For those who are retired, this is especially key to ensure income splitting not only for today but also for the future. Retired investors often have several investment accounts ranging from IRAs, 401Ks, taxable accounts, CDs and more. A tax strategy will bring it all together and will allow you to look at the “forest before you decide what you need to do with the trees and the branches.”
A solid foundation is important in achieving your long-term financial goals and desired lifestyle. Without the integration of the four pillars your financial plan will lack the support it needs to withstand the changes in the economy, stock market and most importantly your life. In sports we hear this often “the team is only as strong as the weakest player.” You want to make sure that none of your pillars will be considered a weak link.
Next month: The Consumer Financial Protection Bureau – A friend or foe?
