BY Al Seymour, ChFC®, CLU®, CRPC®, CASL®, AEP®, CAP®
For years people have focused primarily on market returns, and perhaps even tried to time the market. Some have been successful and some have not. A better approach may be financial planning where you focus on your goals, not just on returns.
The concept of financial planning is foreign to many. Yes, it involves your investments, allocations and measuring your level of risk, but it involves so much more.
The important aspects of comprehensive financial planning include looking at your assets, liabilities, protection (insurance coverage), income, expenses and your life goals. These values help develop a picture of your cash flow, cash reserves, net worth, taxes, retirement, projections, and estate. You may have additional goals of educating your children, vacations, a second home or a new vehicle. Since there are only so many dollars to go around, it is important that the right amount of money is allocated to each goal. This allows you to use your dollars in a more efficient manner. When you have a plan, you may realize that you are on track or ahead of reaching a particular goal, and can commit surplus dollars for other goals where a shortage is indicated.
During good and bad markets, focusing on your goals may keep you from making bad investment decisions. During the down market in 2008, many clients questioned whether they were invested properly. Granted, part of this was due to fear of the market at that time and what would happen in the future. Because they had a financial plan, however, I could show them that based on their goals, expected long-term return averages, and the prospect of inflation, they were still on track to meet their goals. For retired clients, I was able to show them that they still would have sufficient dollars to continue to provide for their needs in retirement. Having a plan also helps the advisor pick investments that are appropriate for your goals. It takes away the “do it yourself” or, as I have often called it, the “shotgun approach” to investing. Selecting investments due to performance is important, but just as important is the selection of investments that help protect against downward risk. Believe it or not, sometimes a less aggressive investment may perform better in the long run due to less extreme ups and downs in price along the way.
An underserved area that we often see in others’ financial plans is the lack of insurance planning. This could be attributed to the fact that many people do not understand the importance of insurance in their financial plan. For example, you might be planning for your retirement or paying off your home. A death, disability or long-term care event could lead to your family using dollars for expenses that had been set aside for your long-term goals. A well developed and calculated plan will tell you how much insurance you actually need for this coverage.
Planning also helps you decide whether you can add charitable giving to your goals. If your plan indicates you have more than adequate dollars for your retirement, then you might be able to share some of your wealth while living, or plan an appropriate strategy for passing on your assets at death.
As you can see, comprehensive planning does take work. However, a sound financial plan can also lead to a more confident and less stressful life. Working with competent professionals, such as your financial, tax, and estate advisors, may make things easier both now and in the future.