During my annual physical recently, the doctor took my vital signs, reviewed my medical records and, after reading my EKG results, said, “Well, the computer says you’re having a heart attack.” But the computer got it wrong.
I’m in my 40s and I run marathons, and my heart rate is extremely low. So, after reading the electrocardiogram, the doctor got to work. She asked me several questions, reviewed past data and my medical history. After doing her research, she canceled the machine.
The same situation may apply to people looking to establish a financial plan or review their current plan. Without the right data and the right questions, even a financial plan that uses sophisticated software to create a financial model can yield an answer that is not reality.
January is when many people review their portfolios and update their financial goals for the year. Due to the performance of the stock market in 2021, investors who own stocks have seen their net worth increase; some people are worth more today than ever before. This can give the impression that their financial plan is very solid or cause some to think that they don’t need to revise their plan for the coming year.
But was the next bear market factored into the plan? What about personal or family changes, such as a move on the horizon, potential tax rate increases, or the prospect of buying that second home? All of these life changes can have a major impact on a person’s financial strategy – questions that a computer model probably won’t ask.
When it comes to financial planning, data entries are of crucial importance, as well as the answers to these questions. A financial advisor would need to ask a wide variety of questions for the model to work.
When you review your plan in January, here are some key questions and recommendations to consider.
Is your portfolio always invested correctly to match your goals?
When developing your financial plan, a goal is almost always to become financially independent and retire comfortably. With the growth of the market in recent years, many people could achieve this goal sooner than expected. However, the three years of strong positive equity market growth we have experienced recently will not continue forever.
Investors should not assume that last year’s portfolio returns will be the norm in the future. Instead, they should rebalance their portfolio to incorporate the appropriate level of stocks and bonds to match their retirement horizon. A portfolio that is too aggressive can experience a sharp pullback in the next bear market, and retirement security can be undermined. Determine if your portfolio is properly invested for your retirement horizon.
If you have a financial plan, assumptions have been made that may no longer be true. Here are some examples:
- Are you thinking of buying a holiday home, only to realize now that your price must be much higher? Today’s real estate market continues to be hot, so the costs to buy or build are higher than you might have expected several years ago.
- Were you planning four years of college expenses for your children, including one who is now enrolling in medical school?
- Did you get a nice promotion at work and now your earnings trajectory is skyrocketing?
- Will higher tax rates impact your plan?
All of these changes need to be taken into account, so that your plan continues to stay on track, while having a real idea of what your financial future looks like. An up-to-date financial plan can provide much more clarity when big financial decisions need to be made.
Who relies on you for financial support?
Ten years ago, everyone in your family might have been healthy. Now, there might be an aging parent who needs financial support to pay for health care costs. You may have a sibling with children who may not be able to afford school fees.
If so, and you’re willing to help, consider your options and work with a financial advisor to determine the amount of money available to help your loved ones. And make sure you understand the impact on your personal retirement plan. Most computer models will not ask you this type of question!
What are your plans for retirement life – and how much will they cost?
Many people have dreamed of using their retirement to travel the world. Now, if that time has come, figure out how often you’d like to travel each year and how much it will cost. Others are considering moving to a warmer climate in another state, which will involve selling and buying a home, moving costs, and other expenses.
What is the cost of living in the state you plan to retire in, compared to where you are now? What about state income and property taxes? Housing expenses can take up a big chunk of your nest egg, so calculate the cost of these moves before making big decisions.
Finally, what keeps you up at night?
When you ask customers this question, the answer isn’t always about money. A response that I often hear is: “I worry about taking care of my parents and my children at the same time as I juggle my business. Another common response is, “If something happens to me, does my spouse know how to continue to run the household?”
Sometimes it helps clients talk about these concerns and hear stories of how others have made it through similar life events. Financial advisors tend to have a diverse set of life experiences with different clients and may have an unbiased perspective to share.
Of course, money is a normal concern. “What if this bull market ends too soon, or if we are heading for a major crash?” “Do we have enough to cover our health care needs in retirement? This is where financial modeling, incorporating probability analysis, can provide peace of mind. Knowing that you’ve gone through the numbers and worked through various scenarios can help you sleep better at night.
Life does not flow in a straight line. Taking the time to review and update your financial plan to reflect recent changes, as well as to think about upcoming changes, is a good way to control your financial strategy. Use the new year as a time to take stock of your finances; ask yourself the right questions… and don’t rely solely on a computer.
Partner and Wealth Advisor, Brightworth
Lisa Brown, CFP®, CIMA®, is the author of “Girl Talk, Money Talk, The Smart Girl’s Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s”. She is the Practice Area Leader for Professionals and Business Leaders at Wealth Management Firm Brightworth in Atlanta. Advising busy business leaders on their finances for nearly 20 years is his passion at the office. Outside of the office, she is an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.