How to Build a Financial Plan Beyond Your Retirement Account
“If you’re hoping to retire someday, invest and start early.”
Many of us have probably heard this, and it’s true. However, investment accounts are only part of a comprehensive financial plan. Many people mistakenly believe contributing to a 401(k), IRA or brokerage account means they have a plan in place.
However, those accounts are just tools. The actual plan is a road map for how those tools should be used to help achieve financial goals.
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In addition to making retirement savings contributions, a lot of people review their portfolio statements periodically, largely focusing on balances, returns and performance.
These statements are great for providing a snapshot of where your investments stand, but they don’t explain how they’ll be used to help you achieve your goals.
For example, two individuals can have identical portfolios with very different strategies. Someone who’s planning to retire in the next few years will likely have different risk considerations and income needs compared with someone who is still decades away from retirement.
Rather than focusing on balances and returns, it’s the financial plan that helps determine whether those investments align with your needs and circumstances.
Don’t forget tax planning
Tax planning is another area in which portfolio statements fall short. They can tell you what type of accounts you’re invested in, but they don’t explain how withdrawals will be taxed or whether your money is in the appropriate account based on your situation.
Since investment accounts are taxed differently, where money is saved and how it’s taken out can significantly impact your tax burden.
With a well-rounded financial plan, pre-retirees have the ability to understand how assets are intended to be distributed across retirement accounts and how withdrawals can be managed to reduce tax liabilities.
Adapting to changes
Unlike a portfolio statement, financial plans are designed to adapt to changes in your life rather than changes in the market.
Major life events such as a new job, marriage, the birth of a child or approaching retirement influence financial priorities, oftentimes requiring updates to an existing strategy.
A person’s goals and spending habits can also change throughout retirement. The early years of retirement, also known as the go-go years, might mean traveling or taking on new experiences.
As the slow-go and no-go years approach, priorities tend to shift, especially when it comes to healthcare. However, financial planning doesn’t stop when retirement hits.
Although a portfolio statement might list beneficiaries, it doesn’t account for greater estate planning needs. Some people might want to leave assets to children or grandchildren, while others might decide to donate to charity or set specific guidelines for how their wealth should be distributed.
A financial plan helps make sure those wishes are incorporated into your overall strategy.
Paying attention to investment returns is important, but they’re only one piece of the pie. A portfolio statement can give you a snapshot of current beneficiaries, various retirement accounts, and current investment performance.
It’s the plan that helps determine whether those investments support your financial goals.
