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What Exactly, is a Financial Plan?

The words Financial Plan carry a lot of weight. For some, they conjure images of dusty binders full of complicated, unintelligible charts and tables wasting space on a closet shelf. Others consider them a mysterious tool used only by the wealthy elite. And while there may have been some truth to that a few decades ago, nothing could be further from the truth today.

Advancements in the industry along with huge strides in capability have made financial plans not only accessible to everyone, but a useful and timely roadmap to support sound decision making, thoughtful retirement planning and effective legacy intentions.

One could argue that effective financial planning is similar to planning a trip. Let’s say you plan to drive from New York City to Los Angeles. It’s likely you will plot your route, determine where to stop along the way, choose sites to see as you pass through, pack appropriately for the season, etc. You hope for the best, but also prepare for the worst. What if the transmission fails? What if construction delays slow you down? What if you have time for five side trips, but have 10 places you want to see?

Now, expand that trip from weeks to years. Switch the route to a career path and choose life goals instead of sites to see. Test out “what if” scenarios so you have a sound fallback when something goes wrong. Prioritize those goals to determine which ones are flexible and which ones are non-negotiable. Just as you would refer to your map and itinerary along the way, use the financial plan to guide your decisions and model your choices. 

A tool to guide your financial decisions through life.

It would be easier for all of us if there were concreate answers to basic financial questions like “How much do I need to retire?” When should I draw Social Security? “Should I pay off my mortgage?” “What is the best way to draw my pension?”. In reality, the answer is “It depends.?”

That’s where a financial plan comes in. A well-built, timely and current plan captures current data like income and taxation and future goals for spending, then models outcomes DEPENDING on the answers to those questions. In other words, instead of your advisor saying you can retire at 62; the advisor can ask when you want to retire and let the plan tell you if that works. If it does, great! If it doesn’t, then what is your next best choice?

One of the most valuable benefits of using a financial plan is having all the pieces incorporated into one big picture so you aren’t making lone decisions in one area that could eliminate choices in another. For example, you may make a choice to retire at 62 and draw Social Security but fail to consider the extra expense of pre-Medicare health insurance.

Some of the most common questions that can be answered with a financial plan include:

Have I saved enough for my retirement and my other goals?

At SYM Financial, we put a lot of work into answering this question for our clients. There is no one size fits all answer. Saving “enough” depends on when you want to retire, what you want to do (spend) in retirement, how long you will live and what you want to leave behind, if anything. The best way to determine answers specific to you is with a financial plan. With a plan, you can build your ideal scenario, then choose tradeoffs when necessary to get there. Maybe you plan to travel the world when you retire at age 55. A plan will reveal if this is reasonable, or if you need to work to age 60 in order to travel the world. On the flip side, maybe retiring at age 55 is more important, so you travel domestically instead. There is more than one way to retire and a plan helps you determine what’s best for you.

How do I start to build wealth for the long-term?

Working backwards from your long-term goals, a financial plan can define what you need to save/invest today to get there. A plan can guide accumulation into the best accounts (qualified and/or non-qualified) to maximize results. A plan can inform asset location – which investments are best placed in what accounts to minimize taxation and afford flexibility. A plan can measure if you are taking enough risk without taking more than you need.

How do I pay off student loans?

There are often two approaches to managing debt – the math answer, where is the best return; and the emotional answer – how do you tolerate carrying debt. Using a financial plan to model each choice, and evaluating trade-offs provides quantifiable information and forecasts the overall effect on the long-term.

How will I pay for my child’s wedding or college? 

Like student loan debt, there are multiple perspectives in answering this question. An advisor should remind you to prioritize your financial future over your child’s expenses. But as parents, many of us consider college and weddings to be one of our priorities. A plan will help evaluate the impact of spending now on your overall financial well-being. It can determine a range of spending that is both appropriate for your nest-egg and supports your children.

How much house can I afford? Can I buy a vacation home?

With a constantly changing landscape of home values and mortgage rates, this answer is always changing. Working backward from long term success, a plan can reveal just how many and which goals can be achieved including buying a home or vacation property. It can depict that sweet spot of “you can spend this” without sabotaging your retirement, or “if you spend that” you will sabotage your retirement. This is particularly true with the purchase of vacation property. Taxation is quite different for secondary residences, especially when receiving rental income. Of late, there are many people with rental vacation property on the Florida Gulf Coast who fell victim to hurricanes who are currently receiving $0 rental income.

Should I take my pension as a lump sum or monthly payments?

Often, taking a lump sum pension payout is the best answer, and we test that answer in the plan to be sure. However, the answer depends on cash flow needs, marital status, age of a spouse, health conditions and other factors. Even with the lump sum option, it is always best to test to verify.

How can I maximize Social Security? What about Medicare? 

The age at which one draws social security is always a gamble. You bet you will live long enough to earn back at least what you paid in. The government bets you have a short life and leave money behind.  That said, the decision really comes down to what works best for your cash flow needs. A customized financial plan can help evaluate the options and choose what is right for you. Factors in the decision-making process include past and current marital status, plans for part-time employment, longevity and ages of both spouses in married couples, disability, and more.

Medicare can be straightforward – eligibility begins at age 65, but the myriad of choices and variety of costs can be a deal breaker if your long-term cash flow needs are not in the plan. A plan doesn’t indicate which supplements to choose, but it does account for the expense, which may impact other discretionary spending choices.

What if the plan is wrong?

It can be hard to have faith in a model forecasting your net worth 20 years into the future. That’s why the best plans model a) conservative defaults and b) randomized testing of two standard deviations.

The nature of modeling requires assumptions for certain data points like rates of inflation, costs of education, returns on investments, the price of healthcare and lifespan. Ideally, the defaults are as conservative as possible to stress the plan and better produce reasonable results. If a plan “works” only with a 10% year over year rate of return, the plan doesn’t really work. And to be sure, one must ask “what if?” What if there are three market corrections after I retire? What if inflation remains high for many years? Good planning will run automated, randomized testing to help determine best and worst-case scenarios and deliver the statistical likelihood that all spending goals can be met.

The next step toward a clear financial plan is to engage an advisor.  Schedule a complimentary financial discussion with a SYM financial advisor and begin to gain clarity.

Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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