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Financial Phases

Your life moves through multiple phases. So does your financial plan. As you enter adulthood, you begin a career and maybe a family. Your children become adults and you begin the next phase of your life.

Each phase has a set of opportunities and challenges. Each phase builds on the previous and creates additional opportunities for the next. Your financial plan adapts to the reality of your current phase…with consideration for the upcoming opportunities and challenges. Common questions include:

How much should I be saving for college, retirement and other goals?

Saving is a primary focus when reviewing plans when you are in the Building a Foundation and Preparing for Retirement phases. Too many investment advisors (and other titles) prefer the focus is on them. They believe their advice is the reason you will enjoy a successful retirement. This is simply not true. The success of your plan is more dependent on your decisions than their advice.

Your first decision is to determine how much you should be saving for retirement and other goals. Your best answer is based on your goals and expectations in retirement.

When you have a clear plan for saving, you will feel more comfortable spending what isn’t saved. It is important to find balance between saving for the future while enjoying today.

Schedule a time to discuss current and/or future saving requirements

How much can I spend during retirement based on current plan?

Spending is a primary focus when reviewing plans if you are in the Preparing for Retirement and Enjoying Retirement phases. If you’ve done a good job in the previous phases, the consideration will likely shift from “how much” to “from where?”

As you prepare for retirement, you’ll create a plan that outlines spending during the transition from accumulation to distribution. In many plans, there is a period between retirement and the collection of guaranteed income sources. This period allows opportunities and challenges that weren’t available during the Building a Foundation phase.

As you transition into retirement, you may have years of lower income (between earning and collecting Social Security) which creates opportunities to realize gains and taxable income at a relatively lower tax bracket. Converting a portion of your Traditional IRA to a Roth IRA might be beneficial during this phase.

While the transition may offer opportunities, it also creates challenges. The biggest challenge for most during this period is the loss of a regular income (employment earnings). It is important to remember you chose to save for the future. The future is almost here. Reviewing your cash flow chart shows expected expenses (and income) and anticipates the account it will be withdrawn from.

A clear road map into the Enjoying Retirement phase ensures you will do just that. Finding balance between spending and saving throughout your plan is arguably the most important aspect of all phases in your financial plan.

Schedule a time to discuss current and/or future spending

What protections should I have in place at this phase in my life?

There are multiple forms of risk. Too often, those looking to sell a solution are focused on only one form of risk. When removing (or insuring) one form of risk, you will be exposing yourself to another form. We address the trade-offs between various forms of risk during each phase of your plan. The most common risks addressed in plans include:

  • Loss of income due to death. Typically insured via life insurance.
    • Varies based on time frame and income
  • Loss of income due to disability. Typically insured via disability insurance
    • Varies based on time frame and occupation
  • Market loss. Typically addressed via overall portfolio allocation
    • Varies based on cash needs and behavioral response
  • Tax consequence. Typically addressed via consideration of asset location
    • Varies based on income.
  • Health concerns. Typically addressed via medical insurance
    • Varies on multiple factors
  • Long Term Care concerns. Typically addressed via Long Term Care Insurance or realization you will self-insure.
    • Varies based on family health history and age

The importance of each risk fluctuates as you transition through the phases of life (and your financial plan). Understanding how each risk (and the cost to insure it) affects other parts of your plan will help you make informed rather than emotional decisions.

Schedule a time to discuss what could go wrong in your current plan

How do my choices impact taxes?

As you transition through the phases of your financial plan, you’ll likely find yourself in various tax brackets. In most cases, you begin in a low bracket as you enter the workforce. As you progress in your career, you will likely increase your taxable income. As you transition into retirement, you may find some opportunities to take advantage of relatively low tax brackets. When you have both (if married) started collecting Social Security and begin Required Minimum Distributions, your tax bracket will likely level out. If one passes, the survivor may find the impact of filing single has negatively impacted their tax bracket.

When considering taxation, our focus is on the relative difference between projected tax brackets and the opportunities available to you in your current phase. The media tends to generalize tax advice.

Taxes are a cost over which you have some control. It is important to look beyond this year’s tax obligation when reviewing your plan. Sometimes paying more today is a good plan when considering what you will likely pay in the future. Each phase and more importantly, each household, has its own set of opportunities and challenges when it comes to overall taxation. Understanding how taxes impact your current and future plans will help you make informed rather than emotional decisions.

Schedule a time to discuss how taxes impact your plan

How (and where) should I invest?

There are “rules of thumb” when considering where to invest. They include the belief you should “accept” more market risk when you are younger (longer time horizon). The opposite side of that advice is that you should focus on income later in your plan.

You will likely read articles sharing the wisdom of investing in a Roth IRA (or 401k). The next article might tell you to invest in a Traditional IRA (or 401k).

Advice is geared to address the average or majority. As you consider your financial plan, you must consider how your plan differs from the “average.”

The creation of a financial plan helps you see the bigger picture. During the review, you will…

  • List the accounts available to you. (Pension, 401k, IRA, Brokerage)
  • Use the tools that benefit you the most in your current phase
  • Review your current and projected future tax bracket.
  • Do not simply assume you will be in a higher bracket in the future…you might be surprised.
  • Consider the time horizon for EACH Goal. Funding college has a different time frame than funding retirement.
  • Investments and investment accounts should be aligned with goals.
  • Consider the restrictions on your available choices.
  • Is there a penalty to withdraw early?
  • Is there a benefit to using an account for a specific goal?
  • How do the choices in my 401k compare to other accounts?
  • If I pay taxes today (Roth or brokerage), how does it compare to what I would pay in the future?
  • If I defer taxes today (Traditional IRA), how does it compare with what I will pay in the future?
  • Should every account have the same allocation? Why or why not?

The reasons why, how and where you invest change as you progress through the phases of your financial plan. Understanding how the next phase is impacted by today’s decision creates a plan that maximizes opportunities throughout your plan rather than focusing solely on today.

Schedule a time to discuss how investments impact your plan

Finding balance in your financial plan

When creating or reviewing your financial plan, you learn how to balance your current needs with future goals. Finding balance is often the most difficult part of your plan. We recommend reviewing your current phase AND considering your next phase. We often remind people… “financial and retirement planning is a process NOT an event.”

Interview us!

Like most financial planners, we do not charge a fee for the first meeting. When you are ready to review your plan, we recommend interviewing a few financial planners and/or advisors. Take the time to understand the differences and decide what is best for you. If you feel we should be among those you interview, schedule a time to meet below.

Schedule a time to discuss balancing today's needs with tomorrow's goals