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Some people view a visit to their financial advisor as they would a trip to their dentist. They don’t necessarily look forward to it, it’s not especially fun, and they hate it when they hear they have a potential problem. The numbers and industry jargon can be unfamiliar and overwhelming.
But it doesn’t have to be that way. Financial planning done right can and should be an enjoyable experience. The key is for the process to be integrative and holistic; it should focus on your whole life, not just how your money is invested.
A planner will approach the holistic financial planning by focusing on these key steps:
1. Creating a vision
This invaluable step sets the foundation for your plan projections. It requires commitment and introspection. Completing goal-planning exercises can establish what you want to be, have and do in the next year, five years and in retirement. This step is particularly important for pre-retirees, because often they have not determined exactly how they will live in retirement. It encourages you to formulate an ideal day, week or month and prioritize desires that should be part of the spending plan. It also encourages dialogue between you and your spouse to ensure that you have similar views on your retirement lifestyle and helps you and the planner quantify how much money you’ll need to achieve these important goals.
2. Organizing your financial life
Financial planners require timely, accurate data from their clients to provide appropriate advice. Most people don’t enjoy gathering data. Our parents taught us about good dental hygiene and grooming, but many of us were not taught about good financial hygiene. It should be habitual — pay your bills, balance your checkbook, review your expenses, and review and file your important financial documents regularly.
Annual meetings with your financial advisor force you to focus on and organize your financial life. Technology makes it simple to track spending and store files and documents securely. This information can then be easily sent to your financial planner as needed.
3. Incorporating your vision into the plan
Once you’ve organized your financial data and delivered it to your planner, she can then incorporate this data into your financial plan. Because you’ve already identified your goals and quantified how much money will be spent for each goal and when, you can feel more confident that your plan accurately reflects your lifestyle. After all, the primary reason most people see a planner is to answer the question, “Am I going to be OK if I live the lifestyle I desire?” If you think you’ve been heard, you’re more likely to be motivated and excited.
The plan details should be transparent. The financial advisor shares her assumptions with you, and you in turn confirm their accuracy. These assumptions can be further tweaked to do a “what if” analysis. Various scenarios could be stress-tested or evaluated. For example, you may want to know:
- How early can I realistically retire? How much more will I need to save to reach a desired retirement date?
- What will happen if one of us requires long-term care or dies early?
- How will supporting an adult child affect my ability to retire?
- How will lower interest rates or Social Security reform affect my plan success?
Running through these scenarios provides more context for your situation and insight into how you might need to refine your spending or lifestyle because of an unforeseen event.
5. Delivering the plan
The final plan should summarize the discussions and projections that were developed in steps 1 through 4. Ideally, the summary should include a one-page report with action items for all the areas of your financial life: cash reserves needed, a summary of spending needs and tax strategies, additional insurance required, changes to the investment strategy or allocation, recommended titling of accounts and beneficiary designations, and a list of life goals such as travel plans and large purchases for the upcoming year.
For example, I use a one-page sheet that is segmented by financial area with a color-coded system to show areas that are on track (green), need improvement (yellow) or require a change (red). It includes a short action list at the end. Together we decide who will be responsible for each item and, where applicable, create a deadline for completion. Backup projections and data will also be provided for reference, but they have already been reviewed with you before the final recommendations. Note that normally a financial plan takes 12 to 30 hours to complete, which would include a life-planning session, an interim meeting to review the assumptions and projections and a final presentation meeting.
6. Maintaining the plan
This process is not “one and done.” Your circumstances — your job, your marital status, the birth of a child, or a health problem — change. The government is constantly revising taxes and retirement rules. Your plan is dynamic and needs to be adjusted as your life changes. Ongoing communication with your planner and annual reviews are critical to keeping your plan on target.
Benefits of holistic financial planning
As you can see, this process requires an investment of time, commitment and money. But financial planning also can help you save time and money by simplifying accounts, minimizing your tax burden and recommending proper insurance coverage.
Most importantly, your advisor provides coaching to help you stay with a rational plan when markets become volatile. Whether markets are going up or down, planners can prevent you from selling low and buying high. Ultimately, your planner serves as your accountability partner to ensure a smooth transition through life events such as retirement, buying a house and funding your kids’ college education.
The bottom line
Financial planning doesn’t have to be painful, but it does require effort. If you’re truly committed to the process, you can establish better money habits and an exciting, achievable path for the life you’ve always dreamed of.
Image via iStock.