The Hierarchy of a Meaningful Financial Plan

The Hierarchy of a Meaningful Financial Plan

By: Carli Smith, CFP®, Wealth Management Advisor

Choosing Investments: Important? Yes. Meaningful? Not as Much as You Might Think

I recently had the pleasure of meeting with a couple that had never spoken to a Financial Advisor before. From our initial talk, I gathered they have been good savers, have managed to stay out of debt, and have saved as much as possible within their respective 401k’s. After all, these are things that we all pick up along the way as the sure path to financial success. While I agree that this is the foundation, being financially successful in the long run requires much more than that. Regardless of how you come into your wealth, either over time or through a windfall, being financially successful really boils down to understanding what is meaningful within a proper financial plan versus what is important. We run across this concept all the time in life. There are a lot of important moments through the years, but are they meaningful? In other words, if at the end of your life you were given the opportunity to say what you are most grateful for, are you going to say, “I am so glad I paid off that car back in 2020” or, are you going to say “I am so glad I was able to spend so much time with my grandkids”. While it is important to pay off the car to help with your overall budget, it isn’t near as meaningful as being able to spend so much time with the grandkids.

There are a lot of important components of a financial plan, but there are drivers of success that are more meaningful and impactful to your overall financial success than others. In many cases, the focus tends to be on the investment planning or “beating the market”. But good financial planning decisions go well beyond how you invest. By using a financial advisor that takes a comprehensive approach to financial planning, better decisions can be made to help you optimize your outcomes so that you can focus on what is most important to you in your life.

Good financial planning involves providing advice on building wealth, protecting wealth, and determining a good spending strategy in order to maintain your wealth. None of these involve a laser focus on your investments. In fact, within the hierarchy of financial planning, investment selection is surprisingly lower on the totem pole than you would think. That’s not to say it isn’t important. It is definitely important. It’s just not near as meaningful as everything that comes before it. In the following breakouts, I have listed, in order, what we believe is the hierarchy of a meaningful financial plan.

#1 – Consistently Saving and Investing (Building Wealth)

Not everyone is destined to hit it big with a financial windfall. For those who must build their wealth otherwise, it is imperative to consistently save and invest over time. The data is grim on what Americans have been able to save. According to Fidelity’s second quarter 2019 analysis of retirement savings trends, the average worker saves just 8.8% percent of their pay within a 401k plan. In conversations with individuals, I have found that it isn’t necessarily because they can’t save more. Rather, in many cases, it is because they are only saving enough to get the full match from their company. Or, they just arbitrarily decided on a contribution rate. Regardless of the reason, this is not nearly enough of what is required to have a successful retirement. How much and how consistently you save has a FAR GREATER impact on your results than what you choose to invest in. Putting your energy into figuring out ways to save more instead of putting your energy into getting a higher return and playing around with timing the market is a much more prudent use of your time. To figure out what you should and could be saving and determining how much investment risk to take requires proper financial planning. It should be a savings and risk tolerance level that not only helps you reach your goals, but also is something that you can stick with, consistently, over the long run in good times and in bad.

#2 – Proper Financial Planning (Protecting Wealth)

Regardless of where your wealth came from, either through consistently saving or through a windfall, it is important to distinguish the difference between investment management and financial planning. It is easy to confuse the two since many financial planners do investment management but not all investment managers do financial planning. A good comprehensive financial plan is based on your goals and risk tolerance, proper tax planning, withdrawal planning, estate planning, portfolio tax efficiency, investment planning, and protecting your assets. When you only focus on the investment management, unfortunately, there are still gaps that exist that can put your wealth completely at risk. In addition to this, the financial plan should be revisited annually. It is a lot like going to the doctor for a physical every year. It’s good practice, let’s you know if you are on track, and allows for discussion and modification based on any new life events. When searching for a qualified Financial Advisor, look for one that does comprehensive financial planning and is also a Fiduciary.

#3 – Proper Spending Strategies (Maintaining Wealth)

It is one thing to be a prudent saver or to have a healthy investment account, it is another thing to be a prudent spender once you start withdrawing from your investments. Spending is a very meaningful component of any sound financial plan. Often, when individuals try to estimate what they can spend each year from their investment accounts, they overestimate how much they can withdraw each year, or they are unsure how to withdraw in the most tax efficient way possible. This could cause the unfortunate consequence of running out of money before the end of your life expectancy and paying more in taxes than necessary. In addition, there could be outside income sources, like Social Security or pensions, that need to be thought through in order to maximize those benefits.  Working with an advisor that takes into account all of these considerations in order to maximize your spending, minimize your taxes, and help you understand a healthy withdrawal rate is key to making your money last your lifetime.

Conclusion

As you may have gathered by now, the drivers of your success are highly dependent on a few key things that you can control. How much you save and invest each year in order to build your wealth, proper comprehensive financial planning in order to protect your wealth, and how much you spend in order to maintain your wealth. While investments are important, they are not the most meaningful aspect of your overall financial plan. Unfortunately, markets go up and markets go down over the course of our lives. We never know how the market is going to behave in any given year which means chasing investment returns and trying to outguess the market is basically wasted energy.

At ML&R Wealth Management, we believe investments are very important. We have an investment philosophy built on academic research that is evidence based. There is power in focusing on the things you can control versus the things you can’t. What we CAN control is the cost of your investments, how well diversified you are, proper asset location, and proper asset class exposure. What we CAN’T control are market outcomes and the economy. Understanding this concept and building out portfolios to represent this allows your investments to be a facilitator of your goals and overall comprehensive financial plan.

We are always here to help you with these topics and any other financial questions that you and your family may have. Please contact us with any questions.

Want more great articles on investment topics? Subscribe to our monthly Wealth Management newsletter for relevant articles about investment topics written by our advisors. Click here to sign up!

About Author

Carli Smith, CFP®

Carli Smith is ready to embark with you on your financial journey. She will take the time to understand your values and listen to your goals. With this solid foundation, she will build out a long-term investment strategy and a dynamic portfolio based on the comprehensive financial planning built out around what matters most to you. Her attention to detail, love of problem solving, and compassion for clients allows her to be an ideal investment management advisor.

Related posts