By Joe Allaria
Learn more about Joe on NerdWallet’s Ask an Advisor
Many people weigh the success of their financial life entirely on the performance of their investment or retirement accounts. In the past, the world of financial advice revolved around what funds or stocks to pick and when to buy or sell. I’d like to share an idea that may sound a bit extreme.
Your investments are not that important.
Does your rate of return matter? Yes. Should there be some strategic direction in how you approach your investment decisions? Absolutely. Would it be appropriate to enlist a professional to assist you with these things? Yes.
But consumers tend to put all of their mental focus and energy into this one part of their financial plan.
The Certified Financial Planning Board of Standards bases its curriculum on five key areas of financial planning:
- Investment planning
- Retirement planning
- Insurance planning
- Estate planning
- Income tax planning
I continue to see new clients walk through our doors who have, at best, a moderate grasp on their investments but little to no knowledge about their retirement plan — and even less about insurance planning, estate planning and income tax planning.
The reason your investments are not that important is that all of these other areas could be equally or even more important to the success of your overall financial plan.
For example, I recently met with a couple planning to retire in 10 years. Between pension income and Social Security, they would have enough income throughout retirement to sustain their lifestyle. (Kind of reminds us of the good old days, right?)
I was able to provide two major revelations for them. The first was that because of the modest size of their investment accounts and the fact that the majority of their retirement income would come from pensions and Social Security, the rate of return (and the amount of risk taken) on their investment accounts wasn’t that important. They didn’t have the time to accumulate much in those accounts, and thus they would not be counting on those accounts for income or spending money until much later in life. Of course, you should always weigh your risk tolerance and make sound decisions on your investments — but in their case, that was a minimal point.
The second revelation was that the only thing that could derail their retirement plans was if the husband was not able to work the next 10 years and couldn’t continue to build up his pension. If he died prematurely, his wife would have to choose between a death benefit of approximately $250,000 or the chance to draw half of his current pension benefit. Ouch! And, with a minimal amount of life insurance, we clearly agreed that the insurance gap would be the biggest concern for them as they approached retirement.
The lesson to take away is this: Don’t be deceived into thinking that your investments are the only thing that matters when it comes to your financial plan.
Yes, investments are certainly important, and we should give our investment plans their due respect, but we, as consumers, need to start looking at these other areas of financial planning to ensure that there are no major gaps that could derail our future. With the couple I just described, I could have spent the majority of our meeting talking about investment rate of return and how unique our investment philosophy is compared with everyone else’s. But that wouldn’t have done them any good if the husband didn’t make it to retirement.
This is just one example, but all the more reason to take another look at all components of your financial plan.
Image via iStock.
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