Do You Have a Written Financial Plan?

In an industry filled with professionals who call themselves “planners,” and with Baby Boomers reaching retirement en masse, it’s remarkable that clients might still go home without a comprehensive retirement plan.

You know, a tangible record that clearly identifies your goals and the steps necessary to help reach them. A map, a blueprint — whatever you want to call it — that covers the basics, from budgeting and income, to long-term care and estate planning. And everything in between.

A lot of people visit our office seeking a second opinion. Often, they already have a financial adviser; sometimes it’s a good relationship that’s lasted many years. They want to know what I would do differently — or what they might be missing.

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I’m quick to congratulate them on their existing relationship. Working with a financial adviser indicates that you’re proactive, organized and serious about achieving your long-term financial goals. I’ll suggest we start by looking at their current plan.

I’m not exaggerating when I say no one ever — ever — has shown me a written retirement plan.

Sure, I’ve been shown lots of investment statements, pie charts, life and annuity contracts and the occasional Excel spreadsheet. But this is just paperwork. A lucky few might have some strategic justification for their positions and projections. But an investment strategy is not the same thing as a comprehensive retirement plan.

A recent Schwab survey found that only a quarter of Americans have a written financial plan. That so many people would transition out of the workforce without a comprehensive strategy is by itself cause for alarm. Call me cynical, but I’m also suspicious of the folks claiming to be prepared. I believe consumers, and many of their adviser professional counterparts, are woefully naïve when it comes to understanding how robust a quality plan should be.

Unless you’re looking at all the things that impact your money and lifestyle, your plan may be one-dimensional. Be sure your plan includes the following:

• Retirement — When, How Much and How Long: Any strategic endeavor requires a clearly defined goal. When do you want to retire? How much spendable income do you want every month for the rest of your life? How long do you think you’ll live? Record your answers. This is your foundation.
• Other Goals: Measure the impact of ancillary goals that will affect your transition and the years beyond. Will you stay in your current home? Do you need a new vehicle? Are you done paying for weddings and college tuition? Is it important to provide your heirs an inheritance? Will you need to care for or provide for any living parents? All your financial commitments, no matter how big or small, should be considered.
• Income Focus: Many measure their success by the rate of return earned on their investment portfolio every year. When you’re retired, returns take a backseat. What matters most is whether your assets are positioned to deliver desired income, as consistently and with as little risk possible, for the rest of your life.
• Benefit Maximization: A married couple may have several hundred ways to collect Social Security. The difference between the most and least lucrative options can reach hundreds of thousands of dollars, especially for those with long life expectancies. A comprehensive analysis can identify your options, protect a surviving spouse (if applicable) and can help you avoid unnecessary penalties. Perform the same exercise for any eligible pensions.
• Risk Analysis: Whether by need or necessity, you may need to withdraw money from your retirement accounts to provide additional income. Determine the rate of return your investments will need to achieve provide that amount of income. This will help you gauge how much risk is even necessary to take. And be honest about your comfort level with the stock market. Believe me, it’s not easy taking these withdrawals when you’re worried about losing money or running out.
• Stress Test: How does the plan hold up in a worst-case scenario, like a major market correction? In retirement, when you’re taking withdrawals instead of making deposits, it can be mathematically impossible to recover from a big loss without having to downsize your lifestyle or living situation. As the saying goes, preparing for the worst helps you hope for the best.
• Inflation Adjustments: Just because your expenses are covered today doesn’t mean they will be tomorrow. The prices of goods and services, particularly health care, tend to increase at a much faster rate than most guaranteed sources of income, like Social Security. Be certain that your income strategy can keep pace.
• Tax Reduction: The IRS won’t go easy on you in retirement. Sure, you might end up in a lower income tax bracket, but you’re also introduced to a slew of retirement specific pitfalls. Did you know that up to 85% of your Social Security benefits may be taxable? Or at certain income levels you may pay almost quadruple the standard rate for Medicare due to surcharges? Let’s not forget RMDs, mandated withdrawals on your qualified retirement accounts that sometimes inadvertently trigger higher taxes and other penalties. It’s imperative to consider future tax consequences when designing your plan.
• Health Plan: Many will regrettably overestimate what Medicare covers in retirement. According to Fidelity, a 65-year-old couple retiring this year will need an average of $275,000 to cover out-of-pocket medical expenses. And that doesn’t include the costs associated with long-term nursing home care. A thoughtful health plan will map out where Medicare falls short, so you can protect the integrity of your care, your assets and your family.
• Survivor Needs: If you’re married, you should consider how the surviving spouse will be affected. At the very least, one of the Social Security checks goes away. They might even pay more taxes, having now landed in the single tax bracket. Anticipated changes to other sources of income, expenses and the living situation should be considered well in advance.
• Legacy Planning: When it comes to the average estate plan, often the singular focus is preserving the estate from taxation. While this is important, equal attention should be paid to the circumstances under which the assets are transferred. Inherited wealth can invite guilt, marriage issues or be used irresponsibly. The focus should expand beyond asset protection to make sure the people you care about are benefited.

While this is a lot, retirement planning is not one size fits all, so there may be much more you’ll need to cover to be adequately prepared. You deserve a plan that provides a clear path, connecting your goals to your resources, and one that’s mindful of all of retirement’s many facets.

Given its scope, it can’t just be in your head. Make sure you can hold it in your hands.

Kim Franke-Folstad contributed to this article.

Investment Advisory Services are offered through Arcadia Wealth Management, LLC, a registered investment adviser. Insurance products and services are offered and sold through Arcadia Financial Group, LLC and individually licensed and appointed insurance agents. Arcadia Financial Group, LLC and Arcadia Wealth Management, LLC are affiliated but separate entities.