How would I set up a financial plan without retirement in mind?
You're right, much of the financial planning industry does focus on retirement planning. That's for a good reason because once one retires, their assets and other cash flows need to replace the income they earned while working.
But your question is a good one because the concept of retirement has changed over the years. More people move into retirement gradually now and some never do retire, although they've attained an age that traditionally signifies retirement.
So to answer your question, I suggest that you budget your finances in a way so that you are constantly building your net worth. You do that by using debt for things like (reasonable) housing, transportation, and education only, but not for taking a vacation or buying holiday gifts. If you can avoid debt all together, even better, but I believe that it's OK to borrow to gain ownership of the roof over your head, your transportation to work, and the education background you need to get a job and earn income in the first place.
After paying your expenses, put something away each and every paycheck. A rule of thumb is that you should have 3 to 6 months of living expenses liquid in an emergency savings account that you can access in the event you lose your job, have a major car repair, have a major hospital bill, or aren't unable to work. Over and above that amount, you can begin to invest.
For beginners, I suggest using a simple asset allocation using low-cost ETFs. By a simple asset allocation I mean taking your age, subtracting it from 100, and the resulting number is the percentage you should have in stocks. Your age should be put into bond ETFs. This simple asset allocation I mention is very simplistic and has been debated however is a good starting point for many folks looking to get started with investing.
At this point, if you have used debt wisely and are able to comfortably make payments on it, you have built your 6 month emergency fund that is sitting in a savings account, and you have begun to invest, frankly you are on your way to 'financial success'. There's your financial plan: you are building your net worth as you are living within your means while building your assets.
But I would be remiss if I didn't add some additional comments to round out and complete this discussion even if some of what I follow with brings back the concept of retirement. I do so because there are some benefits to using retirement-oriented tools even when retirement isn't the primary goal. (It really is hard to avoid the power of retirement as it impacts financial planning in so many ways!)
The type of investment account you establish can be an IRA (Individual Retirement Account) which allows for tax-free growth of the assets in that account until they are withdrawn however IRAs have restrictions and tax penalties should you want to access the funds prior to age 59 1/2. A Roth IRA is generally more advantageous than a Traditional IRA as the proceeds of a Roth IRA are tax-free upon withdrawal whereas the growth on assets in a Traditional IRA will be taxed as current income. All things being equal, tax-free is nearly always better than just tax-deferred. But to avoid the IRA trap entirely with the various restrictions they have, just establish a 'regular' investment account. Be prepared to keep accurate and detailed records of that regular investment account as it will be taxed each and every year.
Another easy way to set money aside is through an employer-sponsored retirement account. Again, such accounts such as 401(k)s, 403(b)s, and 457s are geared toward retirement and thus subject to restrictions to get at the funds prior to age 59 1/2. However, if your employer-sponsored plan offers a match, the match represents free money to you which is a good thing and tough if not impossible to get anywhere else. So consider contributing to such a plan to the degree you can maximize your match. Many plans offer the ability to borrow against the account balance prior to retirement which is a way to access your account in a pinch albeit not optimal.
Another less used, but potentially very beneficial approach, is to set up a fully-funded cash value life insurance contract. In such an arrangement, the goal is to put as much as you can into your policy relative to the death benefit to avoid it from becoming a MEC (Modified Endowment Contract). The cash value will grow over time either at a guaranteed rate or not depending on what kind of policy used. There will be very little cash value appreciation in the early years of the policy however generally in a correctly established policy after about 8-12 years they tend to have more cash value than what has been contributed into them. That available cash value can be accessed for any reason through withdrawals or loans on a completely tax-free basis when correctly structured prior to age 59 1/2, which is very good from a financial flexibility standpoint. Unlike setting up a savings account or investment account which you can do yourself online, you will need to find a qualified broker to assist you in setting up a cash-value life insurance policy. You can't do it yourself online due to the complexity associated with the product. Also, keep in mind that unhealthy or elderly folks may not be eligible for a policy as there is an application process that everyone needs to pass. It is advisable to seek multiple quotes and illustrations through a broker who works with several different insurance companies to ensure you get set up with a policy that suits your needs well.
Last, it's essential to include the concept of protection into your financial equation as well which is what insurance does. Above, I discuss how life insurance can be used as a strategic asset, but keep in mind that it would also trigger a larger payout to your designated beneficiaries in the event of death. Critical illness insurance pays out a lump sum in the event of severe sudden onset cancer, stroke, or heart attack. Disability insurance is paycheck insurance and would kick in while or after your emergency fund is used. Long-term care insurance triggers in the event that a person cannot perform at least 2 of the 6 activities of daily living (bathing, transferring, toileting, dressing, feeding, continence). Of course, you should have adequate limits on your home and auto insurance as well, making sure that your have sufficient liability coverage which I suggest should be at minimum $250,000 but probably more like $500,000 or $1 million for just about everyone.
I hope you can take away some of the suggestions I've shared here with you to establish and build a solid financial plan that is not necessarily geared towards retirement.
I like that question and unlike some others, I think I understand what you may be asking. I have clients who speak to me about many things because they want to follow a path and "not do anything stupid" (their words, not mine). I think that you can have plans which do not necessarily focus on retirement or for that matter, any financial goals.
For instance, younger people often ask simply how much of their income should they be saving/investing. If you consistently save about 20% of your income and invest it prudently, you will have a nest egg in the future. Is that earmarked for retirement or other goals? Does it matter? Well, it could if you need to access it early, so then you have to decide when you may want to access the fund and make sure it is in the proper bucket, (tax-deferred or taxable). Estate planning is for everyone, you should have a will and power of attorney and health care directives. If you are 25 years young and healthy and get in a horrible accident, who has the right to make a health care decision for you? Do you want people guessing or having to get a court order to be able to help you? Likely not, so get those simple documents completed.
While many people may plan with a terminal date, I can also see why some people may want a simple check-in and making sure that they are not doing anything considered financially "dumb."
You are correct, most advisors that sell products or have to hold assets will only focus on those in or nearing retirement. Many fee-only advisors, like myself and those at www.napfa.org, who sell advice not products, work with those from age 20-60. I specialize in working with families in their 30s, 40s, and early 50s.
I would first define what you are looking for. Things like:
-- Budgeting and Cash Flow
-- Meet a specific goal, like travel, car, marriage, house, etc.
-- Help with Investing
-- Retirement (it sounds like this is not relevant now, but running a few scenarios and having a conversation might give you peace of mind -- or things to consider)
-- Balance risk -- health insurance, estate, life, investments, disability, etc.
If none of this is relevant to you, then you may not need a financial plan, at least not a full one. If you are just looking for few questions answered, then you can look at a planner that works on an hourly basis.
We work on an hourly and project-based basis. Please see our website and fee schedule as an example. Or gives us a quick phone call if needed:
You can also do some self-planning with our core-planning software:
Mark Struthers CFA, CFP®
My own financial plan calls for the accumulation of sufficient resources to be independently wealthy. I have calculated the lump-sum that would be required to be conservatively invested, and yield enough annual income to pay my bills and support my lifestyle.
This lump sum is being derived from both earned and unearned income. I run a life insurance sales organization and am paid strictly through commission, therefore, my earned income varies on a yearly basis. I have to make adjustments as I go, which is fine.
The point of the plan is to enable me to work because I want to, not because I have to. I happen to very much enjoy my business, and intend to keep building it even when I can afford to do other things. If I play my cards right, in terms of building my organization, I'll be able to do so.
So, I understand your point about retirement. I don't think anybody in my family has ever retired, because we like to work. But if you are going to work for decades, you deserve the opportunity to make it a matter of free choice, not just to meet your obligations.
I would also add that I have shied away from designating a specific age at which I will attain this freedom. I have had too many responsibilities and challenges along the way that place demands on my finances; raising a family, building a business, family medical issues, etc. I have, therefore, had to learn how to make the process of becoming independently wealthy meaningful and satisfying.
Thank you for this question. Whether or not we plan to retire or even think about it, the reality is that we are all faced with a finite number of years of life. So even if retirement is not an issue or concern at the moment, there will come a time, perhaps way off in the future, when we hope we will have sufficient income so we can continue to enjoy the lifestyle we would prefer.
The reason why a lot of financial advisors focus on retirement planning is that what we do now has an important influence on how we will be able to live in our later years. During our working years, which can last four decades or more, prudent investors emphasize the importance of saving enough for later on. Later on is the time when income from investments (we hope) is sufficient to replace income we receive when we are working. In most cases, income from investments is supplemented by Social Security and for a few people also by pensions.
The total income from these sources may or may not be enough. But waiting until retirement or just before retirement to start thinking about these kinds of things will be too late to make adequate adjustments that may be needed.
That's why it's never too early to think about retirement planning. The exercise is straightforward. It begins with gathering information about what you are earning, what you are spending, what you own, and what you owe. With this information, you can then add key events that will impact any of these four areas. For example, buying a house, having children, and paying for education.
All of this information is then digested by financial advisors using appropriate software to generate an analysis as well as guidance for adjustments that may be needed to ensure that what's available in the future will be enough for your needs and desires.
This is the starting point. Financial plans should be reviewed regularly and revised whenever there are significant changes to the information.
You may not know when or if you will want to retire, but you can begin planning with various ages between 65 and 85 to see what the outcome will be for each. Better to know now and be able to do something about it rather than waiting until it's too late to do anything.