Here’s when you need a financial plan

Do you need a financial plan? Maybe not. A complete written financial plan is a solid analysis at any given time. This differs from the general financial situation Planning, which the Certified Financial Planner Board describes as advice on how to achieve short- and long-term financial goals. You can’t have a financial plan without a financial planner, but you don’t need a comprehensive written plan to benefit from ongoing financial counseling.

What is a financial plan?

What is included in a financial plan or model? The deliverables and the level of detail of the analysis vary from one consulting company to another. At Darrow Wealth Management, all of our financial models include cash flow, net worth and pension projections, as well as Monte Carlo stress test analysis. Other modules and areas of analysis depend on the situation.

Examples include modeling the sale of a business, a large purchase (e.g., a vacation home), what-if analysis, or stock option liquidation strategies after a Initial Public Offering.

Here’s When You Probably Need a Financial Plan

A template is the only way to bring together your entire financial picture. From cash flow to savings strategies and tax implications, a plan helps quantify different planning approaches, compare scenarios, and evaluate options for achieving your goals.

Robust plans are generally more appropriate in situations where the following three factors apply:

  1. The objectives are clear, quantifiable and the basic assumptions can be formulated with a reasonable degree of certainty
  2. There is complexity, planning options and a decision to be made following the analysis
  3. Need to quantify tax planning opportunities and their implications

Data quality is key in financial modeling

Trash inside, trash outside. A financial plan can only be useful if the assumptions associated with it are accurate and well defined. What good is a plan that shows you can retire in Florida tax-free at age 67 if you don’t want to work someday after age 60 or leave California?

Other common examples of nebulous data include: thinking about career changes (starting a business or one of the stay-at-home spouses), disagreements over the price of buying a new or second home , or the calendar and value issues related to the sale of a business or the proceeds of a windfall.

Sometimes these questions are ideal for what-if scenarios, but not if they are a key part of the whole analysis. Many people will benefit from a comprehensive financial plan at some point in their lives. But it doesn’t always make sense to do so now.

What decision(s) can you make with the results?

If there are no decisions or actions likely to arise from the analysis, you may not need a financial plan. Models are most effective when planning opportunities exist, there are multiple (perhaps competing) goals, or alternative paths to consider.

Here are several examples:

  • After a windfall, figure out how to split the extra cash between college savings plans, a brokerage account for retirement, the max boat budget
  • Evaluate the after-tax income flow if you retire at 55 or 62, how the eventual purchase of a vacation home will affect cash flow, and whether it is better to buy with cash or a mortgage
  • Analyze pre-tax contributions versus Roth 401(k), Roth mega backdoor, or a Roth retirement conversion strategy considering cash flow needs, tax savings, and legacy goals

As the situations above illustrate, to analyze all relevant aspects of a complex decision simultaneously, you will need a financial plan. While a model is the only way to bring all the pieces together, it’s also important that the plan be actionable and decision-driven.

Sometimes investors aren’t faced with a major decision and just need to get an idea of ​​what their 401(k) maximum might bring them in retirement income.

Need to quantify tax planning opportunities

It’s always important not to let taxes weigh on the dog when making financial decisions. But many money movements have tax implications and cash flow considerations. A financial plan integrates these components together, balancing alignment with long-term wealth goals.

For example, if someone is charity-inclined, there are planning opportunities with donor-directed funds and qualified charitable distributions. Knowing this objective, tax planning with Roth strategies may not make sense in the context of the bigger picture. A financial model can help quantify the best approach.

Alternatively, if the goal is to leave a legacy for the family, investors may prefer to pay tax using Roth strategies even if there are no tax savings. Or since non-spouse beneficiaries must now take on inherited retirement accounts 10 years from now, it may be better to spend those assets because taxable brokerage accounts are eligible for a base increase (under current tax law). anyway). A plan can assess the viability and extent of legacy planning from a cash flow perspective to help ensure that the individual is not at risk of running out of money.

In a final example, consider an employee with incentive stock options (ISO) after an initial public offering. If held long enough, ISOs offer tax advantages. However, there is a real risk that the stock price will drop significantly during this time. A financial plan could help balance the optimal strategy for exercising and selling various grants from a tax perspective with funding needs for other purposes.

Get help with financial planning if you don’t need a comprehensive financial plan

Financial models can be powerful planning tools in the right situations. But sometimes, too much emphasis is placed on the deliverable as some sort of silver bullet (which is not the case). One reason a full plan isn’t always necessary is that advisors often have other tools for projections and calculations. And software isn’t always the solution either! One of the main reasons to work with a fiduciary advisor is their expertise and personal knowledge of your financial situation and goals. It goes far beyond fancy reports and Excel spreadsheets.