The Importance of a Solid Financial Plan

Tom Williams CFP® |
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We are reminded during challenging economic and personal times like we are currently experiencing that having a solid foundation of financial and estate planning is essential.  Human nature tends to want to delay planning and review things when the economy is strong, when we feel more comfortable, or when the daily news is positive.  Now more than ever, however, we not only have a need for a good plan be we may also have the time to revisit our financial plan.  A good, comprehensive financial plan addresses current and future cash flow, appropriate investment allocations for different time periods, retirement planning, estate planning including documents like wills and directives, and insurance coverage; and it should be revisited at least annually.  Having a plan in place can often provide some much needed comfort and peace of mind - knowing that our affairs are in order and we will be able to weather through difficult periods of unpredictable economic swings.

One of the key areas to review at times like this is whether or not you have an adequate emergency fund in place.  This typically represents at least 6 months of your non-discretionary expenses.  You should also keep enough in cash to cover any large expenses that you know are coming in the near term, such as a car replacement. This cash should be held in a liquid savings or money market account for easy access while earning as much interest as possible.

Now is also a great time to review your investment portfolio.  Are your accounts allocated in a way that matches your objective and timeline for that account?  Is there an opportunity to harvest some losses for tax purposes?  Have markets swings created a need to rebalance?  If you need to reduce your exposure to stocks, you should consider using any highly appreciated stock as a direct donation to charity.  You receive a charitable gift tax deduction for the full value of the stock but avoid the capital gains tax liability that would be created if you sold it.

Retirement accounts provide a few unique planning opportunities, especially this year with the recent passage of the CARES Act.  If you would normally be required to take a distribution from your retirement account, you get a pass for 2020.  If you’re under age 59 ½ and need to take money from your retirement savings this year, you can do so without incurring the 10% penalty.  And for 2021 and beyond, the age at which you will be required to start taking annual distributions from your retirement accounts has been increased from 70 ½ to 72.  If you reach age 72 and don’t need the distribution for living expenses, you have the option to direct the required distribution to a charity of your choice and avoid paying the income tax that would otherwise be owed.   

Now is also a great time to review your estate planning documents. Do you have current health and financial powers of attorney documents in place?  What about a living will?  Is your Last Will & Testament up to date and does it adequately reflect your wishes upon the first and second to die?  Are you clear in your intent to fund specific charitable entities at your death?  What mechanisms will you use to pass your estate to your family members?  Is there a need for a trust?  Have you adequately prepared your adult children to handle a financial windfall and do they share your values in relation to money and wealth? 

There are many things to consider regarding your finances, both in good times and bad.  If we can help in visiting these topics with you or in developing a comprehensive financial plan, please don’t hesitate to give us a call.