A comprehensive financial plan is crucial to making the most of your hard-earned wealth as you prepare for or enjoy your retirement. There are five essential areas of comprehensive financial planning. What are they, why is each important, and how can you integrate these areas to maintain a healthy financial life? Learn more in this Williams Financial guide.
DEFINING EACH AREA OF COMPREHENSIVE FINANCIAL PLANNING
When planning and managing your finances, the five areas you must look at include cash flow management, investment positioning & management, tax planning, risk management, and estate planning. Take a more in-depth look at each of these five areas below.
Cash flow management
Cash flow describes the relationship between your expenses and your earnings, savings, and investments. Managing your cash flow looks slightly different depending on whether you are still saving for retirement or currently in retirement.
Before retirement, your cash flow management may include paying down debt and accumulating wealth through savings and investments. After retirement, you will need an income distribution strategy, which includes planning how to replace your regular paycheck and which accounts to draw money from throughout your retirement.
Investment positioning & management
There are three aspects of investment positioning you should keep in mind as you invest your funds:
- Asset allocation: where you plan to put your money to work
- Risk tolerance: how you feel about risk (qualitative)
- Risk capacity: mathematically, how much risk you can take before it negatively impacts your finances (quantitative)
After initial investment positioning, you should undertake ongoing investment management to ensure your asset allocation, risk tolerance, and risk capacity remain aligned as your life and circumstances change. Investors often take on more risk than necessary, so investment management can help you find the right balance for your situation.
Your tax planning strategies should go beyond tax preparation for the ongoing or upcoming tax season. While preparing your tax documents is more of a compliance requirement, tax planning is meant to help you look at the bigger picture.
How can you potentially reduce your lifetime tax liability? As you think about what may be happening in your life during the next year and the years to come, tax planning will help you answer this question and more.
Financial risk is not restricted to investments. Every person has assets that each carry a certain level of risk. It is essential to review what risks you are currently facing, how much of that risk you are willing to keep, and how to leverage insurance to “offload” some of that risk elsewhere.
Comprehensive estate planning involves more than filling out some documents. Some aspects of estate planning include:
- What happens to your assets in various situations, such as if you, your spouse, or both of you pass away
- How your assets will be divided to support intergenerational wealth planning
- Developing philanthropic plans to leave a legacy
- When, where, and how much to give to important people or organizations in your life
Depending on how complex your situation is, you may need to review your estate plan anywhere from every one to five years.
COMPREHENSIVE FINANCIAL PLANNING & INTEGRATED WEALTH MANAGEMENT
It is crucial to account for each area of financial planning. You can, and usually should, leverage the expertise of various financial professionals to accomplish this. However, integrating each area into a complete wealth management strategy will help you optimize.
Integrated wealth management developed from the idea that working simultaneously on each area of your comprehensive financial plan is ultimately more efficient than taking care of each component separately. A wealth manager can act as a team leader, making sure everything is working correctly and together in the right direction.
HOW TO THOROUGHLY COVER ALL FIVE AREAS OF FINANCIAL PLANNING
A financial picture can look different for every individual. It can therefore be challenging to determine when you have planned each area of your financial life sufficiently. However, the first step is to talk to an expert who understands the importance of integrating all five areas.
Some financial advisors specialize in certain areas, some focus more on selling financial products, and others really do comprehensive planning and management. Here are three signs that your financial advisor is a capable, fiduciary integrated wealth manager:
- Professional credentials. What credentials or designations does the individual have? For example, the Certified Financial Planner (CFP) accreditation indicates that they have gone through extensive training and education, at least three years of apprenticeship, passed the certification exam, and constantly met continuing education requirements.
- Years of experience. Has this individual worked in the financial industry for six months or multiple years? If they are part of a larger firm, when was it established, and how many years of collective experience does the financial team have?
- Fee structure. If a wealth advisor or firm gets commissions for certain mutual funds, insurance policies, or other financial products, this may indicate some bias in their financial advice. A fee-only wealth professional is most likely to be a fiduciary partner who prioritizes your needs.
You should be comfortable and familiar with your financial plan, which means your integrated wealth manager should provide clear action items, thorough documentation, and expert advice. They should also be able to coordinate with your existing financial partners or leverage their industry connections to provide you with trusted expertise.
For example, your fee-only Williams Financial team has experience in certain areas, such as cash flow management. If you have an outside tax preparer or estate planner, we can synchronize with them to ensure each piece of your financial plan fits within your overarching wealth management strategy, then work with you to implement and execute these pieces.
Working with Williams Financial opens the potential for you to leverage our connections within the industry, experience regular review in all areas of your financial plan, and enjoy peace of mind knowing that your finances are well organized and taken care of both now and in the future.