Financial planning can become highly technical. Tax laws change, investment markets fluctuate, estate planning strategies evolve, and every family's circumstances are different. Sophisticated planning can add significant value, yet the base of a successful financial plan is usually much simpler.
Before focusing on complex strategies, make sure the fundamentals are covered. Here are five areas we believe every individual and family should review on a regular basis.
Estate Planning
Get your estate plan in order and keep it current.
At a minimum, most people should have an updated will, a financial power of attorney, a healthcare directive, and clear instructions for end-of-life care. Depending on your circumstances, trusts or other estate planning strategies may also make sense. Our article The Legacy Planning Checklist: 7 Documents You Can't Ignore covers the essential documents in more detail.
Having the documents is only part of the process. Make sure your assets are titled properly, and review beneficiary designations on retirement accounts, life insurance policies, annuities, and other accounts. Beneficiary designations generally control how those assets transfer, so they should coordinate with the overall estate plan.
It also helps to keep a letter of instruction telling your family whom to contact, where important documents are located, and what they need to know if something happens to you.
Estate planning also covers the years you are alive. A good plan names who can make financial and healthcare decisions for you if you are unable to.
Debt
Use debt thoughtfully.
Borrowing can be a useful tool when it helps you acquire an asset, an education, or a business opportunity expected to create long-term value. A mortgage on a reasonably priced home, financing an education with an appropriate expected economic return, and borrowing to buy or expand a business can all be legitimate uses of debt.
Be much more cautious about borrowing for assets that lose value or mainly support current spending. Vehicles, recreational purchases, vacations, and lifestyle expenses generally should not need long-term financing if you can avoid it.
Interest rates matter too. The choice between paying down debt and investing should weigh the interest rate, taxes, your need for cash on hand, available investment opportunities, and your overall financial plan.
The goal is not necessarily to eliminate every dollar of debt. The goal is to make sure your debt supports your financial plan rather than controls it.
Insurance
Insurance protects the financial plan from risks you cannot, or should not, take on yourself.
Review property and casualty coverage, including homeowners, auto, and umbrella liability, as your assets and potential liability grow. Your occupation, business ownership, or board service may call for specialized coverage.
Base life insurance on the financial consequences of your death, including income replacement, debts, education funding, survivor needs, estate liquidity, and other obligations.
Disability insurance matters during your working years because your future earning ability may be one of your largest financial assets. Health insurance, long-term care exposure, Medicare coverage, and other healthcare risks belong in the plan as well.
Insurance is mainly a way to transfer risk, protecting your family and your plan from losses you could not comfortably absorb.
Saving and Investing
Consistent saving remains one of the most important parts of building long-term wealth.
Use tax-favored accounts when they fit, including employer retirement plans, IRAs, Roth IRAs, HSAs, and other savings vehicles. Saving consistently, and saving more as your income rises, generally matters more than finding the perfect investment.
Holding assets across pre-tax, Roth or other tax-free, and taxable accounts gives you flexibility when you build retirement income and manage taxes later in life.
Tie your investment allocation to your financial plan. Money you need in the short term should generally be invested differently from money you will not need for many years.
Avoid changing a long-term investment strategy only because markets have recently risen or fallen. Let your life, goals, cash-flow needs, time horizon, and ability to accept risk drive changes, rather than headlines or short-term performance.
For retirees, withdrawals should be reviewed regularly against spending needs, Social Security, pensions, taxes, investment allocation, market conditions, longevity, and legacy goals.
Taxes
Tax planning is different from tax preparation.
Tax preparation looks backward and reports what already happened. Tax planning looks forward and asks what you can do before year-end, and over several years, to improve the result. Consider taxes throughout the year and fold them into your investment, retirement, estate, and cash-flow decisions. Our article Tax Planning Strategies That Actually Move the Needle goes deeper on several of the items below.
- Retirement plan contributions. Review chances to increase contributions to employer plans, IRAs, and business retirement plans.
- Roth contributions and conversions. Evaluate whether recognizing income today could give you more tax flexibility over the long term. See Is a Roth Conversion Right for You?
- Required minimum distributions. Coordinate RMDs with cash flow, tax brackets, charitable giving, and investment strategy.
- Qualified charitable distributions. If you own an IRA and are eligible, consider direct charitable gifts from it.
- Capital gains and losses. Review taxable portfolios for tax-loss harvesting, planned gain realization, rebalancing, and concentrated positions.
- Charitable giving. Coordinate cash gifts, appreciated securities, donor-advised funds, and other strategies.
- Medicare premium surcharges (IRMAA). Consider how Roth conversions, gains, and distributions may affect your future Medicare premiums.
- Social Security and retirement income. Coordinate pensions, Social Security, IRA withdrawals, Roth distributions, and taxable investments.
- Estate and gifting strategies. Review gifts, trusts, charitable strategies, and wealth-transfer opportunities alongside the estate plan.
- Business-owner planning. Review retirement plans, entity structure, compensation, estimated taxes, succession planning, and the timing of income and expenses.
The objective is to manage lifetime taxes while keeping enough liquidity to meet your financial, retirement, charitable, and estate planning goals. Paying the least tax in any single year can work against that.
Keep the Fundamentals Connected
Estate planning, insurance, investments, taxes, retirement income, and cash flow should not operate independently. A decision in one area frequently affects several others, which is why financial planning works best as an ongoing process rather than a collection of individual transactions. We describe what a complete plan includes in A Real Financial Plan: What It Includes, Why It Matters, and Where Most People Fall Short.
Ask yourself these questions regularly, and again after any major life change.
- Where am I relative to my goals?
- Do I need to make any changes?
- What should I be doing now?
- What if something changes?
Sophisticated strategies matter when they fit your situation. They work best once the fundamentals above are in place and coordinated.
Frequently Asked Questions
Q1: How often should I review the fundamentals of my financial plan?
At least once a year, and again after a major life event such as a marriage, divorce, the birth of a child or grandchild, a business sale, an inheritance, or retirement. Tax laws, markets, and family circumstances all change, and a plan written for one year may not fit the next.
Q2: Does my will control who receives my retirement accounts and life insurance?
Generally no. Beneficiary designations on retirement accounts, life insurance policies, and annuities typically control how those assets transfer, regardless of what your will says. An outdated designation can send money to someone you no longer intend, so review designations alongside your will and any trusts.
Q3: Should I pay down debt or invest the extra money?
It depends on the interest rate on the debt, your tax situation, how much cash you need on hand, the investments available to you, and the rest of your plan. An answer that suits one household can be wrong for another, so it helps to model both options.
Q4: What is the difference between tax planning and tax preparation?
Tax preparation reports what already happened in a past year. Tax planning looks ahead, across the current year and several years after, to decide what to do about retirement contributions, Roth conversions, charitable giving, investment sales, and the timing of income. It works best when it starts well before year-end.
Related Reading on the MJT Blog
- The Legacy Planning Checklist: 7 Documents You Can't Ignore
- Tax Planning Strategies That Actually Move the Needle
- Is a Roth Conversion Right for You?
- A Real Financial Plan: What It Includes, Why It Matters, and Where Most People Fall Short
Share This With Someone Who Could Use It
Feel free to forward this article to family, friends, or others who may find it helpful. MJT & Associates Financial Advisory Group, Inc. works with clients nationwide. If you know someone who could benefit from coordinated financial planning, tax planning, estate planning, and wealth management, we would be happy to talk with them.
Ready to review the fundamentals of your own plan? Contact us at (320) 269-7889 or info@mjtassociates.com to schedule a consultation.
