There are some things in life you just can’t plan for: an unexpected illness, job loss, death of spouse, disability. And while experiencing one of these major events can drastically impact your life, having an effective financial plan can help ensure that it doesn’t ruin your financial well-being.
What Do You Need in Your Financial Plan?
Your financial plan should be customized to your own unique needs. To begin, you should clearly define your short-term, medium-term, and long-term financial objectives. Once you have your goals set, you can build your plan with any combination of the following elements:
- Budgeting and expense management: Create a detailed budget outlining income, expenses, and savings targets.
- Emergency fund: Establish and maintain an emergency fund to cover unexpected expenses.
- Debt management: Develop a strategy to pay off existing debts efficiently, minimizing interest costs.
- Investment strategy: Determine asset allocation and investment vehicles aligned with risk tolerance and financial goals.
- Retirement planning: Calculate retirement needs and contribute regularly to retirement accounts.
- Insurance coverage: Evaluate insurance needs for health, life, disability, long-term care and property, ensuring adequate coverage.
- Tax Planning: Optimize tax efficiency through strategies such as retirement contributions, tax-deferred accounts, and deductions and credits.
- Estate Planning: Draft essential documents such as wills, trusts, and powers of attorney to ensure the orderly transfer of assets.
What Could Happen if You Don’t Have a Financial Plan?
If you decide to forego setting a financial plan, there are four major pitfalls you could experience. Let’s break each one down.
Pitfall #1: Falling into Emotional Decision-Making
Many investors choose not to follow a plan (or deviate from their plan) simply because they fear the market and want to jump ship when there’s a downturn. An effective financial plan is designed to help you pursue your financial goals even through unstable market conditions. In fact, when you have a plan in place, you’re helping to protect your assets when markets go down while also affording yourself the opportunity to experience potential growth when markets go back up.
Pitfall #2: Missed Opportunities
For those who fail to plan, regret tends to follow. A financial plan will help you save for future wants and needs such as buying a second home, sending kids and/or grandkids to college, starting a business, or traveling. An effective financial plan can even help you avoid missed opportunities that you may not have anticipated but still want to pursue.
Pitfall #3: Not Having Enough Money to Retire When You Want
As retirement approaches, those who didn’t properly plan may find their retirement nest egg is insufficient, forcing them to stay employed longer than they had hoped. According to one recent report, nearly two-thirds of pre-retirees are either considering or have taken steps to postpone their retirement.1
On the flipside, some retirees are forced out of work early, with more than half of retirees reporting that they retired earlier than they had planned.2 In either scenario, having a plan in place can lessen the financial burden.
Pitfall #4: Running Out of Money in Retirement
What do retired Americans fear even more than death? Outliving their money. This also includes those who are considered high net worth. When you factor in longevity, inflation, and rising healthcare costs, it’s a valid concern. Half of American households are at risk of not having enough retirement funds saved to maintain their current lifestyle.3
If you’re still reading this blog, you can probably guess what we recommend to help offset your risk of running out of money during retirement and prepare for the rising costs of healthcare: follow your financial plan. Your financial plan should also include a spending strategy so you know how much money you can spend during each phase of retirement – that way you can enjoy your years in retirement.
A Financial Advisor Can Help
None of us knows what the future holds. Don’t let the fear of the unknown be the driving factor in making life’s trade off decisions. Instead, gain the confidence financially planning provides in handling unexpected life events. Contact us today to build a financial plan that helps you pursue your goals.
1 Investopedia, “Half of Retired or Pre-Retired Americans Are Considering Working Longer,” August 23, 2023. https://www.investopedia.com/majorities-of-retired-and-pre-retired-americans-are-considering-working-longer-7814247#:~:text=Among%20pre%2Dretirees%2C%20almost%20two,could%20keep%20them%20working%20longer.
2 USA Today, “Think you’ll work past 70? Good luck. Why most of us retire earlier.” January 24, 2024. https://www.usatoday.com/story/money/2024/01/24/most-americans-retire-earlier-than-expected-over-their-health-layoffs/72312011007/
3 Annuity.org, “Running Out of Money in Retirement: What’s the Risk?” March 11, 2024. https://www.annuity.org/running-out-of-money-in-retirement/
Jake Anderson is a non-registered associate of Cetera Advisor Networks LLC, Member FINRA/SIPC. The opinions are those of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives.
This blog is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
