Comprehensive Financial Planning
Seeing The Big Picture
First, most financial advisors do not create financial plans. It is hard work!
But because a plan is what many clients hope for, some advisors position themselves as “planners” to increase their marketability.
A comprehensive financial planner considers each financial decision’s merits to all other matters in a family’s finances. This is also known as looking at the big picture.
Our experience is that clients who get help understanding their big picture have a greater sense of confidence and security in their financial lives.
By contrast, making a decision on a single matter (saving an arbitrary percent in a 401k plan, buying $1M in life insurance, investing in dividend stocks, purchasing real estate, keeping $100,000 in cash for a rainy day, and the list goes on) may inadvertently weaken your plan.
For some families, the impact can be significant.
An example of a significant setback is working full-time at age 62 and taking Social Security income benefits.
Over 70% of recipients take Social Security income benefits at age 62 simply because they can. Having two streams of income can feel enriching. It can lead to a feeling of getting ahead.
However, a comprehensive review of this decision may show that this may not be a good idea. Taking social security income while earning a full-time wage can reduce social security income, not what most people expect.
It gets even worse.
When taking Social Security income at an early age, the recipient will lose the benefit of an eight percent increase in Social Security income for each year they delay.
For example, if someone aged 62 waits until age 67 to take this income, his/her Social Security benefit will increase by 40% for the rest of their life. And their survivor’s life. If they wait until age 70, this income rises 64%.
Social Security is a long-term source of income, perhaps 25 to 35 years. The impact of reduced income in the early years and for life expectancy can be staggering.
Another example of making a financial decision in a silo is a high-income earning client seeking passive real estate income. If this resonates with you, then you will find this example helpful.
Real estate income that is not tax-sheltered is taxed at your highest marginal rate. This means that you will pay higher taxes. Even worse, this passive income can also bump you into a higher marginal tax bracket. This calculation is often not considered in the decision to generate real estate income.
This increased tax also reduces the real return on the investment. To illustrate, let’s assume that you have a 40% combined federal and state marginal tax rate. If your rental property produces a taxable 6% return, the 40% tax will reduce your after-tax return to 3.6%.
Cornerstone likes real estate, especially in generating income in retirement. But for high income earning clients, holding real estate in an IRA account might be better. Holding income-producing assets in a retirement account would defer income taxes.
These are two examples of how comprehensive financial planning can help a family make better big picture decisions.
Your next question might be, “how would I know if I am working with a real deal – a comprehensive financial planner?” To some extent, you will be able to spot this during your first meeting.
You are working with a comprehensive planner when they ask you about the following areas:
- Parent and children
- Retirement questions and goals
- Investment questions and goals
- Estate planning questions and goals
- Tax strategy questions and goals
- Investment style/risk reward
- Real estate you own or wish to own
- Taxable and retirement accounts, including employer plans and benefits
- Pensions and annuities
- Beneficiaries and contingent beneficiaries
- Income and expenses
- Insurances, including life, long-term care, disability, and personal liability
If you decide to engage this planner, then you should expect to provide the following documents:
- Statements for pensions, annuities, and other defined benefit or contribution plans
- Account statements
- Insurance policy declaration pages
- Tax returns, the recent two years
- Documents on business matters
- Social security statements
- Mortgage statement
- Schedule of real estate
- Employer benefit booklet
- Paycheck stubs
This to-do list might seem overwhelming, but it does not take as long as you might imagine.
Whatever the time needed, this work can feel liberating. Because what you are hoping would happen at some point in your life is finally possible.
A professional is reviewing all your financial matters at the same time to make sure they are coordinated.
Cornerstone is the real deal. We can help you see the big picture, strengthen your financial outlook, and help you gain the confidence and security you seek in retirement.
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