The Next Best Thing to a Crystal Ball? A Financial Plan

Financial planning is the process of taking everything we know about a family’s financial circumstances, coordinating this data with their goals and objectives and then overlaying information and assumptions about the future.

A financial plan provides a vision that extends beyond one or two years and allows you to see the long-term impacts of today’s decisions. I like to say that life is a long series of trade-offs. We all live with a finite set of resources -some have more than others, but limited nonetheless. While we may be able to see the consequences of trade-offs in the short-run, most of us have a hard time visualizing the long-term consequences.

Typically, a financial plan addresses a pressing question; the most common being when and how can I retire? But once a base plan is established, it can form the foundation from which many other questions over the years can be evaluated and resolved. These are valuable by-products of the planning process.

Upsize or Downsize: What can I afford to spend on housing?

Housing is one of the most consequential financial decisions you will make, so being able to project its long-term impact is critical. HTG developed a worksheet to help ascertain the total cost of your housing, but this is just the first step in determining what is affordable in the long-run. Your financial plan can put that house in the broader context of your financial future and can tell you when you might need to downsize those costs, as well as the magnitude of downsizing required. If you are in a high-cost area of the country, you may need to consider moving to a lower cost area, and a plan helps provide the specifics needed to add clarity to this discussion.

Helping Family: How much can I help without impacting my own future?

Today’s young adults are finding it challenging to get started in forming a household. This fact is well substantiated, and we see it in rates of home ownership, car ownership, and even marriage and family formation. Just when you are finished paying for your kids’ college, you may find yourself trying to decide if you should help Susie or Jimmie buy their first home, pay for a wedding and/or buy a car. If you have a financial plan already in place, it is an easy process to show the impact on your long-term financial safety of giving Susie money for a down payment.

Of course, there’s a corollary to helping your kids, and that’s helping your aging parents. Often this isn’t a choice, but a financial plan can still help you understand the impacts.

Job Changes: I’m leaving my job; do I need to earn the same income?

It’s not unusual that at some point, someone will ask the retirement question in a slightly different fashion. You know you must work until X age, but how much do you absolutely have to make? Can you downsize your income and by how much, to spend less time at work and more time doing the things you enjoy? Working for less compensation can actually be beneficial if it means working longer. This knowledge can motivate a person to move to work they love.

Estate Planning: What might my estate look like in 10 or 15 years? What should I plan for?

While most estate lawyers can tell you whether you have an estate tax problem today, they will almost certainly have trouble figuring out if you are likely to have one in 5 or 10 years. A financial plan can provide you with a vision of how your assets will grow in total, and where that growth is likely to occur. It can help identify which assets are best suited to fund a trust, which assets should be targeted for a step-up in basis at death, and whether a credit shelter trust is needed at all. A plan can illustrate how your estate changes over time, factoring in different rates of return, different rates of consumption and inflation.

Charitable Planning: How much can I afford to give to charity?

It goes without saying that a good financial plan is going to include a long-term cash flow projection incorporating earnings, spending and portfolio growth. Charitable giving is often part of your annual spending budget, but perhaps you would like to contemplate a significant gift during your lifetime and want to be sure that it doesn’t negatively impact your ability to support your lifestyle based on reasonable longevity and spending assumptions. A financial plan can’t predict the future, but it can provide a range of outcomes that will help in making a more informed decision.

Life Insurance: What amount do I need today and how will that change in the future?

Another byproduct of the financial plan is in estimating what life insurance is needed today and how this may change in the future. This allows for better structuring of insurance products and the potential to save money on insurance that may not be needed.

A financial plan is based on many assumptions which exert a strong influence over the outcomes. So it is important to work very hard on developing and communicating these assumptions. While we can’t predict the future, we can make reasonable estimates based on our knowledge today, then regularly revise and revisit them.

The same holds true for your financial plan. Your circumstances will change over time, and there will be new questions that arise from time to time. By engaging in the planning process, you will be able to make more informed financial decisions along the way.

Robin Sherwood, CFP®

With over twenty years of experience, Robin assists clients in maximizing their financial well-being. She counsels clients in the areas of retirement, taxes, investments and estate planning.

Robin is a CERTIFIED FINANCIAL PLANNER™ practitioner and a registered member of NAPFA. She has an MBA in Finance from the Wharton School at the University of Pennsylvania, and a BA from Colby College.