By Michael Hathaway, CFP®, CFA®, AIF®
Personal financial planning can feel like a big and overwhelming topic…so big and overwhelming that it’s easier not to think about it. This is also true for the related sub-topics: investments, insurance/risk management, taxes, retirement planning, estate planning, etc.
In this article, I would like to present an alternative way of thinking about personal financial planning, one that makes it more accessible and less intimidating. To do so, we will embark upon a “journey” that will guide us through the important aspects of financial planning we encounter as we move through the stages of life.
Stage 1: First Full-Time Job
(After high school, trade school, apprenticeship, or college)
Congratulations on landing your first full-time job! During your first week (usually on your very first day), you will sit down with an HR representative to fill out forms and get paperwork in order. Many of these documents and related tasks will likely involve logistics like getting an email user ID and learning company-specific rules and guidelines. But there will also be another set of documents to review, sign, and, likely, make choices for yourself and your family. These might include selecting health insurance from a menu of choices; 401(k) salary deferral (how much you’ll put away for retirement, and whether you should contribute to the traditional 401(k) or the Roth 401(k) your company offers); whom you will name as your beneficiary; decisions about company-provided “group” disability and life insurance; federal and state tax withholding forms, etc.
It might be exciting as you enter the “working world,” but these decisions can be overwhelming, especially with so many specialized terms and forms. Although this article won’t address every first-day decision, I plan to use it as a “road map” for future articles, in which we’ll walk through each area of personal financial planning and discuss in greater detail how they might apply at different stages of your life journey.
Stage 2: Adult Life
(Buying a house/car, getting married, having children)
Regardless of which challenge you’re pursuing, your life is now becoming more complicated. Maybe you need to budget for the first time to see how much house you can afford, and what sacrifices you’ll need to make to complete the transaction. Maybe you’ve been carrying too much consumer debt or student loans, and you need a plan to reduce that debt in order to buy a house or car (or both).
If you’re getting married, this might involve consolidating and coordinating two separate/different insurance offerings at work, or two different budgets or investment portfolios. Planning with a partner means two sets of ideas about the future and two decision-makers. Having a child can possibly require the need for more life insurance, or at least adding the baby/child to existing health insurance plans (more cost).
It’s also time to think about, and put into place, basic estate planning tools, such as wills, living trusts, and guardianship agreements. (Who will raise your child if you and your partner were to prematurely die together?) Maybe you want to respect your partner’s wishes about end-of-life care. (Do you even know what they are?) These wishes should be written, agreed to, and signed to give them legal power; these documents are usually referred to as “advanced directives,” “healthcare power of attorney,” or a “living will,” and many estate planning attorneys can complete these basic documents as a package for a modest fee. Other than basic estate planning, you might also need to implement other aspects in the financial planning landscape, such as budgeting and cash flow planning, debt management, insurance and risk management, and investments.
Stage 3: Mid-Career
(The middle of your working life; changing jobs; children beginning school or off to college; buying a vacation home; beginning to think about retirement—and how to pay for it all!)
The years are flying by. You’ve changed jobs, maybe more than once. You received a promotion with a significant pay raise. Maybe you are considering leaving your current job for a new job, a new career, or to launch a new company. Your kids are growing up, enjoying their activities, and beginning to think and talk about what’s next. Is it college? Is it a trade? Is it military service?
Have you begun looking ahead to your own retirement? Do you want to buy a second home or vacation home, for possibly moving into upon retirement? How much longer do you want to work? What will your retirement lifestyle and day-to-day activities look like? Can you even afford all this? Areas of personal financial planning you might encounter at this stage include investments, retirement planning, risk management, tax planning, and college planning.
Stage 4: Pre-Retirement
The title of this stage says it all: you’re still working, but you’re thinking about someday stopping, and you’re wondering how this all will work (pun intended). Now is when you make sure you’ve done all you can to be ready for retirement, and put into action all the steps to make your retirement planning more successful: IRA rollovers from prior-company 401(k), 403(b), and 457 plans; decisions related to claiming (beginning) Social Security benefits and other pension plan payments (if you are lucky enough to have those); possible Roth IRA conversions to optimize the tax location of your assets, smooth out taxable income over several years, and position assets for decumulation in retirement; a well-planned financial budget that gives you confidence and peace of mind to enjoy your retirement once it begins.
It has been said that most people spend more time and energy planning a vacation than planning their retirement. Unfortunately, once you have left the full-time workforce, it can be difficult to re-enter. Before you make this decision, it is crucial to spend the time planning, either alone (with your partner) or by working with a fiduciary financial planner who can assist you.
Stage 5: Retirement
(Your “later years”)
Deciding to end full-time employment and “retire” (whatever that means to you) is likely one of the most significant life decisions. Once in retirement, your life will continue to include many smaller decisions to make (adjust) along the way. In fact, once you’ve settled into retirement and it’s “working” for you, this is a great opportunity to revisit your retirement and estate plans and make sure any changes have been factored in.
A well-designed retirement financial plan allows you to have confidence that you can handle any adversity before it arrives—transition to a new home or community, vacation plans, health events—and the expected financial resources remaining at the end of your life. And a well-designed estate plan will ensure that those financial resources are used according to your wishes, passed on to the parties of your choosing, and with the greatest efficiency (i.e., least tax leakage) in the process. At this stage, spending a few hours with your estate attorney, along with a fiduciary financial planner, will give you this confidence.
Take the Next Step
I hope this article helped to untangle the various personal financial planning topics by showing how you’ll likely encounter them at various life stages. If it still feels confusing or overwhelming, consider meeting with a fee-only, fiduciary financial planner that charges only for “advice.” He or she should know the “rules of the road” as they relate to taxes, investments, retirement planning, and other helpful topics, and will put your interests first as they guide you through these life stages.
We at Epsilon Financial Group help our clients make sound financial decisions and solve complex financial matters. If you’re interested in finding out how we can partner with you in your current life stage and beyond, email me at Mike@wealthmatters.com or call (707) 428-5500 to get started.
Michael Hathaway is a fiduciary financial advisor at Epsilon Financial Group, Inc., an independent, fee-only wealth management firm. Mike has worked in the finance industry for more than 20 years and brings a wealth of knowledge and experience in sophisticated financial planning to help his clients make sound financial decisions. He is known for caring deeply for his clients’ well-being, being compassionate, and thinking creatively to help clients attain their financial goals. He prioritizes building long-term relationships and takes the time to listen, understand, and explain so that his clients feel confident in their financial plan. Mike is a CERTIFIED FINANCIAL PLANNERTM, a Chartered Financial AnalystTM, and an Accredited Investment Fiduciary®; he has a bachelor’s degree in cybernetics from UCLA and an MBA in finance and accounting from the University of Virginia. When he’s not working at Epsilon, you can find Mike enjoying anything related to exercise and fitness. He especially loves activities in the great outdoors, such as mountain biking, camping, hiking, and snowshoeing. In the fall of 2016, Mike successfully climbed to the top of Mount Whitney in a single day, the highest peak in the continental United States. To learn more about Mike, connect with him on LinkedIn.