Three Things Missing From Almost Every Financial ‘Plan’
My best workout weeks are the ones when I write in my calendar what I’m going to do that morning. Monday is a 3-mile run. Tuesday is plyometrics. The point is that there is a plan, and if I write it down, I almost always follow it.
The great irony of financial “plans” is that they are the only plan I have come across that isn’t actually a plan. In fact, a plan tells you, “Do this, then do that.”
But most people don’t have a written financial plan that spells things out for them like that.
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So, what could your financial plan be missing?
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1. It’s missing an actual plan
Picture this: You’ve visited your financial adviser and left with a stack of papers filled with numbers and charts. This “financial plan” is basically 100 pages of documents, with the first page telling you whether you have enough for your stated goals. The next 49 pages are cash-flow projections to back up that first page. The final 50 pages are disclosures.
I sort of understand this from a technology and practitioner’s perspective. Personal finance is quite personal. Tom and Betty and Carol and Ben may want to retire this year and spend $12,000 per month.
But based on their values, goals, risk tolerance, health, etc., their financial plans should be vastly different. Their decisions and actions are not going to look the same.
In financial planning software, you can adjust spending, retirement age, asset allocation, etc. But none that I have found will spit out a set of instructions based on that. That’s the role of your adviser.
In the software we use in my practice, I have a one-page summary called a “dashboard” that I customize with text boxes and to-dos to give our clients an actual plan.
After all, if you go to a personal trainer, you probably want them to tell you what to do.
You can access the free version of what we use online.
2. It’s missing a tax and estate strategy
These two areas are widely overlooked by advisers. Unfortunately, this type of planning often comes with much more definitive results than does tweaking a portfolio.
A tax plan for the retired clients we work with has the ultimate goal of reducing their lifetime tax bill. It seeks to realize income when rates are low and defer income during high years. It also weaves its way into portfolio structure, charitable giving and withdrawal strategies.
An estate plan in this context is different than a set of documents, though you still need those documents. You should have a strategy to ensure that your beneficiaries and documents are aligned and that both reflect your wishes.
If you have a taxable estate, it should include strategies to mitigate the tax impact of your passing.
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Financial planning software is getting better in these two areas, but other parties have started to fill the gaps. Holistiplan tax planning software allows financial professionals to model and calculate the benefits of various tax plans.
An estate planning software called Vanilla will read your documents, tell you what they say in plain English and then show you the impact of adjustments.
3. It’s missing answers to the big questions
Planning software, probably from a liability perspective, is not binary. It is not designed to give red lights or green lights on goals: Yes, you can retire. No, you can’t take that trip.
If you’re a DIYer using your software, you will have to have a good enough understanding of the inputs and outputs to make decisions based on a Monte Carlo simulation.
If you are paying an adviser, that’s their job. If they can’t or haven’t told you whether you can afford to retire, afford to help your adult children, afford to take that trip, it may be time to find someone who will.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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