Stages of Financial Planning
I have a secret for you. I don’t blog. I was asked if I’d write one on the stages of financial planning, and given the constant nagging from my marketing director to start blogging, I agreed. In this two part series we’ll cover those stages and hopefully a few insights along the way.
Obviously there’s a 30,000 foot view stretching from adolescence to death, but I felt that folks reading this wouldn’t be too concerned with the youth of today, or paragraphs talking about the compounding effect for 20 year olds vs 30 year olds. After all, most folks reading this were probably the youth of yesterday and you’re just now getting around to reading about this stuff yourselves. So I thought I’d do a slightly more micro approach on the later stages. I’ll try to offer some ideas that I’ve come across in the 10 plus years I’ve helped clients navigate through their later years, in the hopes that you find some things useful or applicable to your own situations,
I’ll call these stages The Planning Time, Honeymoon Phase, Disenchantment, Reorientation, and Legacy. Our first stage ‘The Planning Time’ usually takes place somewhere around age 50. It’s when folks start looking at the balances of their 401K’s and begin wondering “Hmm, is that going to do it?” People fortunate enough to have pensions start adding up their expenses and doing to math. I cannot express how important these years are for your future. The decisions you’ll make set the foundation for the rest of your life. I tell my teenagers that exact same line, but something tells me that you may be more receptive.
The general school of thought for retirement has been that you can safely pull 4% from your moderately invested savings with only a slight risk of your account hitting zero before your blood pressure does. (However, this has been under some scrutiny in the last 4-5 years due to volatile markets and low interest rate environment). So keep in mind that it anything but a ‘rule’ when planning. A few pointers for planning would be to ensure that your allocations haven’t gotten out of whack over the years of raising kids and not monitoring accounts. Going over a detailed budget is going to be vital for you. Notice I didn’t say create a budget, or to budget yourself. I’ll leave telling you not to have a cup of coffee every day to the Suzie Orman’s of the world. Simply put, you need to know what your expenses will be once you retire to effectively plan for it. Common sense right? You’d be surprised at the amount of people that thought they just won’t spend as much during retirement. When in fact I’ve found that people often spend more than they did the years they were working (more on that later). You also want to understand that diversification is more than just a healthy mix of stocks and bonds, it’s also understanding how having tax diversity can impact you. The decision to invest money into tax free accounts or looking into Roth conversion strategies should involve more than, “Should I pay taxes now or later?” One important factor most everyone overlooks is the effect this has on their social security income. The difference between taking money from a taxable vs tax free account could mean paying tax on up to 85% of SSI.
Bottom line, there are a lot of variables and you have to be diligent. Do your homework and lots of it.
The Honeymoon phase is where you allow 30+ years of stress to proverbially roll off your back. You did it! You’re the boss now, your time is yours again. Everything’s new, fresh, and exciting. Your dreams become possibilities and hobbies. You’re also the healthiest you’ll be throughout your retirement (assuming one of your hobbies isn’t a health make over). I encourage folks to plan for an increased budget during this initial phase because hopefully you’ll take advantage of it. Travel, start a new hobby or business, finish your bucket list because unfortunately there’s no telling just how long we have left.
For those that retire prior to social security or pension benefits, this can be a time when you pull significant amounts from your savings. I suggest allocating your accounts into 3 separate buckets (figuratively or literally depending). Funds you’ll use the first 1-6 years in retirement. Funds from 7-15, and money you’ll need 15 years and beyond. The reason is of course you would invest these accounts in a very different manner. If you have 15 or 20 years until you need to use a certain account, you may be able to tolerate a few more fluctuations with the goal of receiving higher average returns along the way.
I hope this phase doesn’t happen for you or at the very least that being aware of it will help to shorten its stay. Disenchantment comes when we become stagnant. Feelings of let down or uselessness can creep in. For some, and I’ve seen it happen to my very own clients, unhealthy spending can occur here. We may tend to impulse buy or depression shop to find our self-worth or to just flat out make us feel better. It is vital to recognize this and stick to your plan…you know that one you created last week!
Thankfully the letdown phase doesn’t last forever, at least not for you right?! You’re resilient, you’re a boomer for Pete’s sake! With the help of time, friends, family, or a combination thereof we ultimately discover our purpose of who we are now that we’re not working. We find and settle into routines. This may also be when we downsize our home if necessary, or simply start accepting a different outlook. This is probably the truest test of our plan thus far and the best time to revisit its vitals and make sure it’s still healthy and preforming in a way that will support you.
This is something that comes naturally to some. “How do you want to be remembered?” Let that sit for a moment. If we’ve done a good job with other phases, chances are you have some tough decisions to make. How will you leave what you have in the simplest, most tax efficient way that will preserve your legacy? There are so many ways to accomplish this that I could write posts for 6 weeks and still not cover them all. Just know that you want your financial planner to have a good working relationship with an estate planning attorney so they can collaborate to identify all possible avenues for you to accomplish this. Whether it be charitable interests, passing wealth to your grandchildren, or meeting the maker with your last nickel, chances are the US government wouldn’t be a choice.
AgeSmart would like to thank Jason Stroede of Clarus Wealth Management, in Fairview Heights, for this weeks blog.