How would I set up a financial plan without retirement in mind?
It sounds like a lot of financial advisors focus on retirement planning. How should someone set up a financial plan when they don't know when, or if, they will ever want to retire?
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."
This question is important because it highlights the financial planning industry’s outdated assumptions about client needs and preferences. Frankly, many advisors haven’t done a great job in adapting to changes in the way clients think about financial security. Up until now, retirement sat at the core of a rigid financial plan because that reflected the prototypical trajectory of the average client. Clients have historically followed similar life cycles: buying a house and starting a family at an early age, climbing the corporate ladder, and retiring at a specific age. If you watch enough financial planning ads on TV, you’ll notice a consistent theme; your plan should focus on retiring at an age of your choice so you can sail off into the sunset without a care in the world. Suddenly, you’re daily life and financial plan become little more than stepping stones to some endgame in the distant future.
There’s nothing inherently wrong with looking forward to no longer working. But some advisors don’t realize that not everyone wants to race to a finish line. Most people have long-term dreams, but many people, particularly in younger generations, are more concerned with how they can use money as a tool to lead a passionate life. Why focus on the distant future when you can focus on enjoying today? Beyond this shift in perspective, life cycles have completely changed. Younger generations are renting instead of buying, they’re creating businesses instead of climbing the corporate ladder, and they’re more entrepreneurial, inclined to find passion in work rather than yearn to stop working.
Of course, these new preferences don’t negate the need for prudent planning elements, particularly saving and budgeting. Even if a younger person has no intention of ever retiring, it’s always important to build assets to pay expenses in the future. We suggest you find an advisor willing to create a plan focused on your shorter-term priorities that adapts to your unique needs and goals.
Financial planning does not have to include retirement and should absolutely be focused on your own goals and time horizon. What probably everyone should plan for is how to cover expenses at each stage in life. Regardless of if or when you want to retire, you would probably agree that growing and protecting your personal assets is a good plan. After evaluating and your current cash flow, assets, and future goals, you could invest in a diversified portfolio that is allocated based on your risk tolerance to help fight inflation and generate additional income.
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®