Financial planning comes with a wide range of benefits, both in relation to your money as well as your quality of life. Not only does the process help you prepare for planned expenses, but it also helps you react strategically when the unexpected occurs.
What are the advantages of creating a proper financial plan? Here are six benefits you may experience once you’ve created a strategy based on your current financial needs and future goals in life.
One of the most important goals of having a financial plan is to have enough money for retirement. No matter how close you are to retirement (or even if you’re already enjoying retirement) proper financial planning aims to make sure your assets cover your lifestyle — both today and in the years to come. Living longer is a wonderful thing, but it’s also vital to manage your investments so you don’t outlive your assets.
Financial planning helps you in three distinct phases of retirement preparation. During your accumulation years leading up to retirement, your financial plan should include the following:
As you enter the beginning of retirement, you enter the distribution phase. At this point, your financial plan should pivot to include:
It’s important to remember that managing your investment portfolio is still vital to your financial health throughout every stage. With retirement for many people lasting in excess of 30 years, portfolios will likely have a dual mandate of both capital preservation and growth. However, once you’re confident that your financial plan will meet your desired retirement lifestyle, it’s likely time to consider the transfer and legacy phase. This new stage of retirement planning involves:
As you can see, retirement planning isn’t just about maxing out your 401(k) each month. A professional financial planner helps you navigate each stage of the retirement process, from preparation to execution.
The benefits of financial planning also include preparing for emergencies and unexpected events, both in your personal life and the broader world that may impact your investment portfolio. Whether it’s economic upheaval from a global pandemic or a sudden health emergency within your family, financial planning helps to remove a layer of stress so you can worry less about your finances when sudden financial changes occur.
Your financial plan for emergencies should start off with a certain amount of liquidity. A knowledgeable financial planner can identify a target amount and recommend low-risk accounts in which to house these funds. That way, you have quick and easy access to your money without its value being subject to stock market volatility. Depending on the situation, you also may need to adjust your current financial plan by pulling back on spending until the crisis is resolved.
Another component of planning for the unexpected is to make sure you’re not over-leveraged. Paying off debt can give you more flexibility when dealing with financial adversity. Your broader financial plan may involve prioritizing certain debts to make sure you’re not over-burdened if another major expense suddenly occurs.
If you’re nearing or already in retirement, an economic downturn may impact the value of your investments and, consequently, your income. Financial planning, particularly with a professional, helps you prepare for these moments. Since recessions historically occur every four years on average, it’s fairly certain that you’ll experience one or more during your retirement years.
Just as you need to change your retirement strategy as you get ready to leave the full-time workforce, you also need to adjust your financial plan as you enter different stages of life. As your family grows, you may decide to save for college through a specialized account like a 529 plan or UTMA custodial account. Personal financial planning helps you weigh the pros and cons of your options and assess the potential impact on federal aid.
Divorce and death are two other life events that underscore the importance of financial planning. Money may not be at the front and center of your mind during these emotionally turbulent periods, however your assets and spending will surely be affected by both events. A dedicated financial planner works on your behalf to navigate the financial details, giving you more peace of mind to handle other aspects of your life.
Financial planning extends well beyond the total number in your bank accounts. It’s about giving you both freedom and a safety net when you need it. Relying on the guidance of an experienced financial planning team helps you get the most out of happy life events while mitigating loss if an unfortunate event occurs.
In addition to helping you prepare for life changes, proper financial planning also helps you better navigate investment decisions, especially during economic downturns. At Dowling & Yahnke Wealth Advisors, for example, we put our clients’ portfolios through a very robust process to help make data-based decisions. We use Monte Carlo simulation, which goes through 1,000 different return scenarios. This allows us to analyze multiple outcomes so that you’re making investment decisions based on objective recommendations rather than emotional reactions.
We don’t believe in timing the market. Instead, we follow an evidence-based approach and focus on the factors we can control. Financial planning will allow you to determine the appropriate level of risk to take in your portfolio (i.e., the balance between stocks and bonds). With the allocation determined, your portfolio should be rebalanced in a strategic manner focused on the long-term; otherwise, you run the risk of doing harm to your portfolio by making “gut-based” decisions that can erode investment returns.
Additionally, financial planning helps you look at the true cost of your investment decisions. Emotional based investing can incur high costs in the form of trading costs and capital gains and can cause you to deviate from sound portfolio management strategies. Tax efficiency is also important when managing your portfolio. In addition to utilizing tax-advantaged investments, D&Y also utilizes tax loss harvesting to offset your taxes with capital losses. Rather than frequent trading from trend chasing, a consistent strategy allows you to be disciplined and focus your efforts on what you can control.
Regular financial planning is also important in order to keep up with the latest changes in law and tax code. A Certified Financial Planner® professional can be an invaluable resource in helping you navigate changes.
In 2020, a number of laws were passed impacting retirement savings accounts, charitable giving, and more. Here are just a few examples of some the changes enacted (temporarily, in many cases):
Without the assistance of a financial planner, many of these changes may have gone unnoticed. A financial planner has access to industry resources and experienced teams to create a strategy that accounts for these economic adjustments.
Whether evaluating emergency legislation or more expected tax code changes, your financial plan should incorporate the latest guidance in order to stay in compliance with laws and to take advantage of potential benefits. It’s important to work with a professional who knows your financial situation and can advise you on the best decisions.
Financial planning keeps your money on track during life changes and periods of economic uncertainty. But it’s also important to account for inflation, especially when considering long-term plans for your financial future.
A financial planner can help evaluate various inflation scenarios by stress testing the portfolio. Doing so will allow you to make adjustments to make sure you’re still on track to achieve your goals, whether it’s increasing your contributions or adjusting the allocation within your portfolio. This is a crucial part of financial planning so that you can retire confident that your money will last as long as you need it without losing purchasing power.
If you haven’t started a financial plan, there’s no better time than the present to take action and build a smart plan that fits your individual needs. If you have a plan in place already, make sure you are periodically reviewing your strategy to ensure you’re on track.
Looking for help from a CERTIFIED FINANCIAL PLANNERTM professional in San Diego? Take the first step by contacting Dowling & Yahnke Wealth Advisors.