Is financial planning dead or much less relevant than in the past? I do not think so, but the question is actually fair given many changes that have occurred in the world during the past several years.
Traditional methods used to make personal financial decisions and plan for the future do not fit as well amidst a constantly changing and complex backdrop. In a recent blog post, I noted that many traditional planning approaches do not adequately address the breadth and depth of long-term financial planning questions faced by mid-life professionals, nor do they anticipate and effectively respond to change.
It therefore seems reasonable to wonder if planning for the future is worth the effort in a world that may look so different, even just a few years from now. Without significant improvements, I do think the traditional financial planning “playbook” is becoming less relevant and might be ready for the ditch!
Should Financial Planning Go to the Graveyard? Not Yet…
The good news is that a new, more modern approach to financial planning and strategic wealth management can be extremely beneficial and useful. I recommend using three key “foundational” elements to overcome the limitations of traditional approaches.
Mid Life Professionals Are Different
The first recognizes that today’s modern professionals think and act differently than previous generations of people in mid-life. They are more active, will pursue varied interests and generally can expect to live much longer than their predecessors. They are also different because they approach transition with a different mindset. Some may want to retire on the “youngish” side (in their 50s), while others may want to work into their 70s (but not necessarily due to financial need). Either way, the financial planning strategies and needs for these contemporary professionals are quite different.
Recognizing these differences is a crucial starting point to considering each individual’s specific lifestyle needs and financial goals. And any strategies that come out of the financial planning process cannot be static! Change will be inevitable and frequent, especially because many of those in mid-life may live 30 years or longer. The planning must be flexible, dynamic and adaptable.
Digging Into the Details Is Essential
The second key element of a modern planning approach involves taking time to prepare a detailed and rigorous view of your finances. This approach must be more robust than more simplistic and formulaic approaches which have been traditionally used. The older approaches primarily relied on forecasting investment returns, projecting account balances and determining whether market volatility could derail your retirement.
That has certainly been a useful staple of most planning models for decades, but it is no longer sufficient. The traditional approach must be significantly enhanced to include a detailed forecast of your household cash flows and expected withdrawals.
This projection must look out over decades and include almost every aspect of your financial life and goals, such as accurately capturing healthcare costs, income taxes, Social Security, and more. For example, income streams such as Social Security, pensions, and mandatory retirement account withdrawals kick in at different times. Similarly, certain expenses like Medicare premiums (which are tied to your income) also begin on certain dates based on government rules (in most situations though not always).
Follow The Cash Flow
These cash flows may greatly impact tax calculations, withdrawal rates from investment accounts, asset allocation decisions and more. Seeing and visualizing the income streams and expenses over years provides an amazingly effective framework for approaching a range of strategic decisions across the financial spectrum. These include:
1) Social Security Claiming Strategies
2) Investment Allocations and Potential Adjustments To Support Withdrawals
3) Decisions about Large Individual Stock Positions and Highly Appreciated Stocks
4) Tax Planning and Minimization
5) Projecting Healthcare Costs
6) Long Term Care Planning
7) Charitable Gifting and Estate Planning
My experience has shown that a meticulously crafted cash flow projection may allow people to create an optimized financial roadmap and confidently make decisions in each of the above areas. Because things change, the roadmap and strategies may evolve too. That is the reason I recommend that these projections should be reviewed regularly and updated as part of an on-going process. Financial planning should not be a “one time” event! New goals arise, circumstances change and previous assumptions may no longer be valid.
Financial Planning: On Going Process and Not a One Time Exercise
This idea of on-going plan reviews and updates is the third foundational element of modern wealth management. After an initial roadmap is created (this often occurs during a job loss or career change), the projection should continued to be reviewed on an annual or bi-annual basis. This allows for evaluating strategies that may not have been appropriate in the past but which could now be useful. That situation is not uncommon when there are new financial needs or when previous assumptions no longer match the current situation.
The good news about all of these modern methods is that today’s professionals do not have to settle for generic, one size fits all formulas to confidently plan for their future. Even though much of today’s financial advising profession still employ yesterday’s outdated financial planning paradigms, you don’t have to compromise your financial planning and investment management needs. There is now a new and effective way to move forward.
If you are in between jobs or assignments, and you are interested in planning for your long-term future and especially retirement, I think this kind of approach might be just what the doctor ordered. Long live financial planning!
