5 Questions to Ask Yourself When Creating a Financial Plan

By Andrea Zoeller, Wealth Manager

“A goal without a plan is just a wish.” – Antoine de Saint-Exupéry

Creating a plan for your finances is no easy task. Your path may vary along the way, but there is one end goal we are all striving towards – retirement. However, having a retirement goal without a well-crafted plan can lead to negative consequences that become difficult to remedy as time goes on. Let’s explore five key questions to ask as you embark on your financial journey. But first, let’s break down what a financial plan is.

The Basics of a Financial Plan

What is a Financial Plan?

A financial plan is not just a roadmap but a powerful tool used to track your progress towards retirement (and other financial goals), guiding you to stay on course. Additionally, if your goal is not on track, the financial plan can help identify necessary adjustments needed to correct shortfalls and to improve the success rate.

Why is a Financial Plan Important?

Imagine embarking on a journey to achieve a significant goal, like training for a marathon. You commit to a training schedule, carefully follow a balanced diet, and seek advice from experienced runners and coaches. Along the way, you track your progress, monitor milestones, and adjust your training regimen as needed. Without tracking and monitoring, it’s difficult to gauge the progress towards your desired outcome.

Retirement planning follows a similar principle. Just as in marathon training, having a clear goal and general ideas about how to achieve it is an excellent starting point. However, without checking in and adjusting along the way, it becomes challenging to know if you’re on the right track.

With retirement planning, time is of the essence. As we grow older, the window for making adjustments narrows. If we delay planning or neglect crucial steps along the way, we may find ourselves running out of time to make the necessary modifications. This may result in delayed goals or compromise to the retirement vision all together.

5 Questions to Ask Yourself When Creating a Financial Plan

1. How do I set a budget for my financial plan?

A big driver for a financial plan’s success is the balance between the income you receive and the expenses you incur. Is the difference between your guaranteed income and your expenses greater than what your portfolio can earn over time? If so, your portfolio’s principal may deplete faster than anticipated, jeopardizing the success of your plan. It is important to get a good grasp on your budget prior to retirement so you can better plan for what you need to have saved to create the lifestyle you desire.

2. How do I factor inflation in my financial plan?

It’s essential to understand how your expenses will increase over the lifetime of your financial plan. A financial plan should incorporate a cost-of-living adjustment for expenses so that it’s not underestimated, and a proper distribution rate can be calculated now and in the future.

3. What savings buckets should I consider for my financial plan?

There are three main savings buckets that should be taken into consideration as you accumulate assets: PRETAX, ROTH, & NON-QUALIFIED. It’s a good rule of thumb to save into all three buckets over your lifetime so you can have flexibility during the distribution phase.

Pretax – there is a tax deduction up front for contributions, assets grow tax deferred as they accumulate in the account, and taxes are owed on the distributions during retirement.

Roth – Contributions go in after tax, assets grow tax deferred as they accumulate in the account, and there are no taxes due on distributions during retirement.

Non-qualified – Original dollars in this account are after tax and each year, any dividends and income that are generated on the original dollars are taxed and paid with normal income taxes. Additionally, any capital gains that occur from a sale of a security will be taxed in the year it has incurred.

4. How do I account for healthcare costs in my financial plan?

A financial plan should account for increased expenses for healthcare throughout retirement and take into consideration the changes in health as individuals get older. Healthcare costs can be a difficult thing to plan for many years in advance so it’s important to overestimate these expenses and consider inflation.

5. Will there be taxes to consider in retirement?

Yes, there will still be taxes to pay in retirement. Income sources such as pensions, Social Security, pre-tax IRA/401(k) distributions, and part time work will be taxed as ordinary income even in retirement. The rate at which it will be taxed may differ from your current income tax rate. This is why it’s important to build up assets in the three different savings buckets so there is more flexibility for income in retirement that doesn’t always have to be distributed from a taxable source.

These are just a few things to consider as you start establishing your financial plan. Your financial professional can customize it to create strategies to help you pursue the goals important to you. Remember, it is never too early to start taking control of your finances and building the foundation for a successful retirement.

Ready to take charge of your financial future? Schedule a free consultation to learn more and connect with our team of experienced financial advisors. Together, we’ll help you navigate the path to a confident retirement.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  All investing involves risk including loss of principal. No strategy assures success or protects against loss.