At my annual physical exam recently, the doctor took my vital signs, reviewed my medical records, and after reading my EKG results, said, “Well the computer says you’re having a heart attack.” But the computer was wrong.
I’m in my early 40s and run marathons, and my heart rate is extremely low. So, after reading the EKG, the doctor went to work. She asked me several questions, reviewed prior data and my medical history. After doing her research, she overruled the machine.
The same situation can apply to people looking to establish a financial plan or review their current plan. Without the right data and appropriate questions, even a financial plan using sophisticated software to create a financial model can give an answer that isn’t reality.
January is when many people review their portfolios and update their financial goals for the year. Because of the stock market’s performance in 2021, investors who own stocks have seen their net worth rise; some people are worth more today than ever before. This can make their financial plan appear very strong or cause some to think they don’t need to revise their plan for the coming year.
But has the next bear market been factored into the plan? What about personal or family changes, such as a job relocation on the horizon, potential tax rate increases or the prospect of buying that second home? All of these life changes can have a major impact on one’s financial strategy — questions that a computer model isn’t likely to ask.
When it comes to financial planning, the data inputs are critically important, as well as answers to these questions. A financial adviser should be asking a wide variety of questions to make the model work.
As you review your plan in January, here are some key questions and recommendations to consider.
Is Your Portfolio Still Invested Correctly to Match Your Goals?
When you develop your financial plan, one goal is almost always to become financially independent and retire comfortably. With the market’s growth in recent years, many people may reach that goal sooner than expected. However, the three strong positive years of stock market growth we’ve seen recently won’t continue forever.
Investors should not assume last year’s portfolio returns will be the norm going forward. Instead, they should rebalance their portfolio to build in the appropriate level of stocks and bonds to match their retirement time horizon. A portfolio that is overly aggressive can have a sharp downturn in the next bear market, and retirement security can be thrown off course. Determine if your portfolio is invested correctly for your retirement time horizon.
What Has Changed?
If you have a financial plan, assumptions were made that may no longer be true. Here are a few examples:
- Were you planning to buy a vacation home, only to now realize your price point has to be much higher? The current real estate market continues to be hot, so buying or building costs are higher than you may have factored in several years ago.
- Were you planning on four years of college expenses for your children, with one now enrolling in medical school?
- Did you receive a nice promotion at work and now your income trajectory is skyrocketing?
- Will higher tax rates have an impact on your plan?
All of these changes need to be considered, so that your plan continues to stay on course, while having a real sense of what your financial future looks like. An up-to-date financial plan can bring much more clarity when big financial decisions need to be made.
Who is Counting on You for Financial Support?
Ten years ago, everyone in your family may have been healthy. Now, there could be an aging parent who needs financial support to pay health care costs. You may have a sibling with children who may not be able to afford to pay for their college tuition.
If this is the case and you are willing to help, study your options and work with a financial adviser to determine how much money is available to help your loved ones. And make certain you understand the impact to your personal retirement plan. Most computer models will not be asking you this type of question!
What Are Your Plans for Retirement Living – and What Will They Cost?
Many individuals have dreamed of using their retirement to travel the world. Now, if that time is here, determine how often you would like to travel annually and what it will cost. Others are planning to move to a warmer climate in another state, which will involve selling and buying a home, moving costs and other expenses.
What’s the cost of living in the state you plan to retire, vs. where you are now? What about state income taxes and property taxes? Housing expenses can take a large bite out of your nest egg, so figure out the cost of these moves before making any big decisions.
Finally, What Keeps You Up at Night?
When asking clients this question, the answer isn’t always related to money. A response I hear often is, “I’m worried about taking care of my parents and my kids at the same time that I’m juggling my business.” Another common response is, “If something happens to me, does my spouse know how to carry on managing the household?”
Sometimes it helps clients to talk through these concerns and hear stories of how other people have managed through similar life events. Financial advisers tend to have a diverse set of experiences in walking through life with different clients, and can have an unbiased perspective to share.
Of course, money is a normal concern. “What if this bull market ends too soon, or are we headed for a major crash?” “Do we have enough to cover our health care needs in retirement?” This is where financial modeling, incorporating probability analysis, can provide peace of mind. Knowing you’ve run the numbers and worked through various scenarios can allow you to sleep better at night.
Life doesn’t happen in a straight line. Taking the time to review and update your financial plan for recent changes, plus thinking through changes to come, is a good way to keep your financial strategy in check. Use the new year as a time to complete your financial check-up; ask yourself the right questions … and don’t rely solely on a computer.
Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
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