Okay then, what is a financial plan?

You may hear some argue that robo-planners will not replace individual, human planners. I call them the “There’s no app for that” group.

We do believe that “There is an app for that.”
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Well, that is not what I had in mind.

But exactly what is “a financial plan”? Finding a good, workable definition is a challenge.

Wikipedia says:

Textbooks used in colleges offering financial planning-related courses also generally do not define the term “financial plan.” For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[8] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards’ definition of ‘financial planning’.

Can’t we define “financial plan”?

Yes. Investopedia offers this broad definition:

While there is no specific template for a financial plan, most licensed professionals will include knowledge and considerations of the client’s future life goals, future wealth transfer plans and future expense levels. Extrapolated asset values will determine whether the client has sufficient funds to meet future needs.

And Wikipedia gives more detail:

In general usage, a financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual’s finances and sometimes includes a series of steps or specific goals for spending and saving in the future.

So you need to project where your assets can take you to be sure you meet your future in good shape. Makes sense

And what is my definition?

A to do list or “action plan” that tells you what you need to change now so you optimize the use of all your resources to achieve your major, long term goals in the future.         

So what does a financial plan look like?

If you paid to have a financial plan prepared, and have a complicated situation, you may get a glossy, bound book filled with projections, charts and graphs, plus text. While much of it may be boilerplate, it will tell you where you are going from now until you die, how your money will follow if you invest according to the plan, and what you need to change on taxes, insurance, and your estate plan.

At the other extreme, you can glean the essential steps and write them all on a PostIt note, which you then place in a spot you see often enough to remind you what to do:

  • Maximize my 401(k) contributions,
  • Set up and contribute to a Roth IRA,
  • Review my investment allocation, use ETFs,
  • Steer clear of any major credit card debt,
  • Review my beneficiary designations,
  • Sign an medical directive, and
  • Save enough for a fun (not too expensive) vacation next summer!

In the end, it doesn’t matter how many pages or what the plan looks like; what matters is that you learn from reviewing your finances and change how you manage your resources so that improve your finances.

So, yes, a simple to do list could be enough, if you follow it!

Estate planning – your homework before and after

Before – what you have to do to get the proper documents executed

Estate planning and the analysis of life insurance connect in the following way, so you want to do the analysis with your financial advisor in order to make sure that the survivors have sufficient resources to maintain the same lifestyle during their life expectancy. The reason that the analysis of life insurance should be done before deciding on what documents you need for your estate plan is that you may choose to increase your death benefit, which could change the size of your potential estate, thereby changing the estate tax planning. That is, if the investable assets are not sufficient, even after making liquid certain kinds of personal property (e.g., a second home), then there is a need for additional life insurance.

In most cases, the type of insurance to be acquired is term insurance. This is merely a death benefit used to fund the shortfall between assets required to maintain the lifestyle of the survivors and actual assets available. Whole life or other types of insurance should only be used when permanent insurance is required, as in the case of maintaining estate liquidity throughout your lifetime.

After you determine the assets required to support the lifestyle of the survivor, you determine to whom the assets flow. For example, you could leave everything directly to the survivor, you could separate some portion of the assets by gift now or at death to go directly to children or you could have a trust control the division of assets as needed over time. Separating assets by gift now would be important if you wanted to ensure some minimum funding for children, such as guaranteeing coverage for their college expenses.

Selection of fiduciaries is next: In determining the final estate plan, many choices revolve around the fiduciary that you select for a particular role. For example, people who typically would have chosen to have all assets flow to the surviving spouse become willing to use trusts when they realize that the person whom they expect to select as trustee will make decisions that they would have made had they survived. The fiduciaries that must be put in place include the following:

a) Executor: This is the person who “marshals” all assets of the estate together, pays death expenses and transfers ownership of property to the surviving spouse or trust. This is approximately a nine month task.

b) Guardian: This is the person whom you select to love and care for your children in your absence. The spouse selects the surviving spouse and then a second or third choice beyond that. This job lasts until each child has reached majority (age eighteen in Massachusetts).

c) Trustee: This person has potentially the longest term job because he or she must manage the trust assets and make distributions of income and sometimes principal to the surviving spouse, children and even grandchildren. Depending on the terms of the trust, this job could last until the children are young adults.

The trustee acts as the owner of assets and manages the investments, taxes and distributions. The trustee can delegate this work, and review what people he or she hires complete for the trust and beneficiaries.

d) Medical representatives and attorneys in fact: you will also want to select people to make medical decisions and manage your finances is you are not able.

After – what you have to do after you have the proper documents executed

Make sure that you update all of your beneficiary designations:

Qualified Plans (IRA’s, 401k plans, etc.): Primary Beneficiary – to the surviving spouse (so he or she can roll over the proceeds to an IRA and thereby defer income taxes); and Secondary Beneficiary – to your children (or your own revocable, depending on whether you want the assets controlled or available to children).

Life Insurance and Annuities: Primary Beneficiary – when not owned by an irrevocable trust, such as group term, to your own revocable trust (for estate tax benefits, e.g., using credit at first death); and Secondary Beneficiary – to the surviving spouse (in case of trust has been terminated for some reason).

Other Assets: Consider changing ownership of any jointly held assets to ownership by one of you. Any assets held as joint tenants with rights of survivorship will go to the survivor by operation of law and never get to your revocable trust. (You want to be sure that you have sufficient assets going to the trust to realize the full tax reduction effect.)

You should also consider compiling a reference book or adding to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

* 1. Location of original will, trust, etc.
* 2. Location of health care proxy and durable power of attorney
* 3. List of professionals with contact information: doctor, attorney, CPA, etc.
* 4. List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.
* 5. Location of insurance policies and valuables such as original titles, etc.
* 6. Location of safe deposit box for valuables and items in #5 or 7
* 7. List of all bank and investment accounts and location of any stock certificates or other documentation for investments
* 8. List of all mortgages, loans and credit card accounts
* 9. Any appraisals or other listing of items by value
* 10. All automatic debits that need to be addressed (stopped, changed)
* 11. List of all password protected accounts (e-mail, on line banking and credit cards, etc.) and where to locate the passwords… and the password to access the passwords!

Let us know if you have questions or comments. Thanks,

Steven