Financial planning, particularly when integrated into the management of your assets, provides you with a comprehensive suite of related services designed to help you best navigate the inevitable twists and turns of your financial life. In many respects, financial planning and investment management are complementary disciplines – and, in most cases, it makes best sense for clients to use both service offerings together.

Gone are the days of going to a “financial planner” to get a financial plan — a/k/a the big fancy binder that sat on your shelf and usually was never updated, monitored, or even implemented. Financial planning is no longer a static or one-moment-in-time endeavor. Rather, financial planning is now a robust, ongoing, and adaptable process that accompanies and guides you throughout your financial life. It is a powerful tool that, when used correctly, helps you make better financial decisions and encourages you to stay on track towards reaching your financial and personal goals. Financial planning also helps you to pinpoint an asset allocation mix that should help you achieve your financial goals without exposing you to undue risk.

While this all sounds great, you may still be wondering just what financial planning is and what it entails. We frequently talk with clients about the numerous benefits of financial planning and, more often than not, find they may not fully understand what financial planning is and why it can be so beneficial to them.

What is financial planning?

In its most basic form, financial planning is the process of evaluating your current financial status, identifying and prioritizing your personal and financial goals, and then assessing the financial likelihood of achieving these goals over time. Think of your financial plan as a blueprint for future financial decisions. As you progress through life, your circumstances will change and your goals will also adjust — you will accomplish some, new ones will crop up, and others may fall off your list. Accordingly, the financial planning process is designed to adapt to and account for these changes.

What does financial planning entail?

Financial planning is an ongoing and iterative process. The first step in this process is the data gathering phase. This primarily involves identifying all of your assets and liabilities along with gaining an understanding of where you are in terms of estate planning and risk management. For example, do you have a current will and related documents? Do you have life insurance, long term care insurance, or disability insurance?

The second step involves identifying and prioritizing your financial goals. While everyone has their own set of financial and personal goals, some of the most common goals we hear about include:

  • We don’t want to outlive our assets
  • We want to be able to maintain our current standard of living in retirement
  • We want to be able to afford nursing or assisted living care if we need it
  • We want to have an annual travel budget in retirement
  • We want to help our grandchildren pay for college
  • We want to leave a philanthropic legacy

Identifying and prioritizing your goals and then regularly revisiting these goals is a critical step in the financial planning process for several reasons. Once you have specific goals:

  1. You can develop and take concrete steps towards achieving them.
  2. You gain a much better understanding of whether and how they might be achieved.
  3. You understand the choices you have and the decisions you may need to make in order to achieve these goals.

One of the biggest benefits of the financial planning process is that it helps you better understand the implications of your financial decisions. For example, you may want to have a generous travel allowance in retirement but also hope to retire at age 60. However, once you begin the financial planning process, you may learn that it is not likely you can realistically achieve both of these goals unless you make some other changes. Maybe you will need to work an extra year or two, maybe you will need to increase your savings rate, or maybe you will need to scale back on your travel plans if your top priority really is to retire at age 60. Armed with this information and the various choices you have and paths you can take, you can then make better decisions and hopefully achieve your goals.

The third step involves evaluating your risk tolerance. Everyone has their own unique ability to tolerate risk. Your ability to tolerate risk is partially based upon your investment time horizon and partially based upon your emotional ability or willingness to tolerate risk. Usually, the longer your investment time horizon and the less reliant you are upon your assets, the more investment risk you can tolerate. Conversely, those with a shorter investment time horizon or those who rely upon their assets to pay their living expenses, are often less able to tolerate investment risk. Regardless of your investment time horizon, however, is your emotional ability to tolerate risk. Said more simply, how willing (or not) are you to tolerate dramatic fluctuations in the value of your assets?

The fourth step involves building and stress testing your financial plan. Once completed, we meet with you to present and talk through the plan and to update it as may be necessary. We will also review any asset allocation and investment recommendations or adjustments at this meeting.  

The fifth step involves implementing the plan. After your plan is finalized, we tie it to your account and portal so that you can track your progress and ensure you are staying on track. We also execute on the asset allocation or investment recommendations per your plan.

The sixth step is repeated regularly and involves monitoring and updating your plan as needed. At least once a year, or as your circumstances warrant, we meet with you to review and revise your plan. Certain major life events such as an impending retirement, marriage, divorce, births or deaths, or receiving an inheritance, often mean a thorough review and updating of the plan is needed. The goal is to keep your plan current, accurate, and complete.

We believe that financial planning introduces some discipline and structure into an inherently nebulous and unpredictable arena. Your financial plan is a living document that evolves as your circumstances change and enables you to make better financial decisions. If you are interested in learning more about our financial planning process and how we can help you, please contact your financial advisor!