The 7 Key Areas of a Comprehensive Financial Plan

Will $1 million dollars be enough for your retirement? Many folks would like to think so or hope so. Before nodding your head in agreement, what’s your budget like? Is it $50,000 a year, $100,000 a year or more? To keep it simple: If you spend $50,000 a year, that million-dollar savings may last only 20 years. If you spend $100,000 or more a year, well, you get the picture. Keep in mind the budget may not even include ever-escalating healthcare costs in retirement or long-term care expenses.   

So, how do you know you will have a successful retirement? Guided comprehensive financing planning is a must. (For more, see: Financial Planning Basics in 5 Steps.)

By learning your goals, cash flow, existing financial assets and future retirement income, your planner can help you discover where you are now financially, where you want to be, and map out a plan to get you there in a most efficient manner. Since most people’s financial life consists of seven areas of planning - cash management, college planning, estate planning, investment planning, risk management, retirement planning and tax management - the process of investment planning or portfolio management only represents one seventh of overall financial planning.

Focusing on investments alone would greatly underestimate your success for retirement. Moreover, every financial decision you make in one area may affect the other six areas as well.

Cash Management

Believe it or not, cash management is the heart and soul of your current or future retirement planning. The computation for retirement is actually a reversed calculation process. In other words, financial planners need to know how much you spend prior to retirement in order to estimate how much you need to save. The process is analogous to first inputting your destination in a GPS before driving towards it.

This cash flow analysis alone can be a wake up call as many folks are keenly aware of their income but few track their expenditures. This could skew people’s mental accounting and result in the impression of having more money than there really is, resulting in some missed opportunities for savings and investing. (For related reading, see: How to Build an Emergency Fund.)

College Planning

Given the daily headlines of growing student loan debts, parents want to save for kids but often choose the wrong vehicle to save, which potentially achieves the exact opposite result. Not only may parents unintentionally jeopardize the opportunity to get the much needed scholarship or grant, but they also could inadvertently give an expensive gift to financially unready kids. Ferrari, anyone?

Estate Planning

Estate planning should ideally start as soon as a person turns 18. Having the basic estate planning documents (will, durable power of attorney for finance and health and a living will) can give you peace of mind. Without those legal documents, your loved ones are in the dark and can’t help you even if they desperately want to.  

Investment Planning

Investment planning is more than just buying and selling securities. Nowadays, even robots can do that. What makes a human advisor irreplaceable is our knowledge to interpret and adjust to new laws and regulations to your advantage. Furthermore, financial planners can help you find the right financial tools to meet your unique needs. (For more, see: 4 Keystone Money Habits to Establish.)

Insurance

Insurance is our way to partner up with insurance companies to transfer the unexpected risk and share the exorbitant cost of unplanned events. Most Americans have no qualms about home and auto insurance even though they are good drivers or their house may never catch on fire. But why the hesitation with long-term care insurance (LTC)? The odds are clearly against anyone who lives pass 65 – three out of four will need LTC. Failing to plan and act upon the recommendations for LTC can be your Achilles’ heel for financial ruin.

Retirement Planning and Tax Management

Retirement planning and tax management go almost hand-in-hand. According to The American College of Financial Services, 68% of the retirees who receive Social Security benefits don’t pay any tax. Sixteen-percent will pay tax no matter what they do because they are in a high-income tax bracket. But the remaining 16% of the population can minimize taxes just like the other 68% if they do some proactive planning. What’s more, once your adjusted gross income (AGI) is high, not only is a portion of your Social Security benefits (up to 85%) subject to tax, your premiums to Medicare part B and D also increase. 

Getting a comprehensive financial plan is similar to getting comprehensive blood work done when you first visit your primary doctor. Subsequently, any enzyme levels that deviate from your initial normal level would indicate a need for further study and analysis. The same is true with your comprehensive financial plan. Without the initial plan, you'll be clueless about your progress or missed opportunities.

Comprehensive financial planning provides a clear picture of your current financial profile and it aids the planner tremendously to strategize and offer guidance for your future. Moreover, planning should be adjusted and evolve with you as your goals and financial status change. (For related reading, see: 5 Financial Planning Decisions You Won't Regret.