Today’s post answers the question, How Do You Know If You Have A Financial Plan? This is a question we get all the time here at our office. A lot of people that think they have a financial plan and  some people that have actually gone out and hired somebody to do a financial plan for them may, not actually have what we consider to be a true financial plan. I’m going to go over seven specific things that I think you need to understand with any financial plan that you’re going to do, whether you do it on your own or you hire somebody to do it for you.

The first thing you want to know is if Your Retirement Is On Track? This is something that, pretty much any financial plan that you do should be able to answer. In other words, if you put in some variables like how much money you have saved up right now for your retirement, how much money you’re putting away on a regular basis, maybe in your 401K plans or IRA accounts, and then apply some hypothetical growth rates and inflation rates, along with your future retirement expenses, you should be able to come back with a pretty good idea of whether you’re on the right track or not.

Number two is that Your Financial Plan Should Account For Variability of Income and Expenses. This is something that only cash flow based financial plans will probably offer. If you think about your income and expenses while you’re working, things were probably pretty steady. You had some income coming in from a job, or maybe from a business, and that was probably pretty steady from year to year, hopefully increasing year to year. Your expenses were also probably pretty steady, as well. As you go into retirement, that all changes. For example, you might retire and not be eligible to collect Social Security right away. So you may have a gap for several years before you’re eligible to take your Social Security benefits. You might have a pension that doesn’t kick in right away. You also might have some expenses that can change, as well. Some of you may be retiring and you still have some expenses related to your kids that will move out and be on their own someday, or a mortgage that’s going to be paid off, maybe in the first couple of years of retirement. So your financial plan should also be able to take into account the variability of those income and expenses so you can understand your gap.

That brings me to number three, Know Your Retirement Gaps. So as you’re planning this out, you want to really understand where those gaps are and specifically, you want to know how much money you might need to be able to take out or might have to take out from your retirement accounts to meet some of those retirement expenses. Because of the variability of the income and expenses, that can change pretty dramatically from one year to the next. So you want to have a pretty good idea of what those gaps are.

Number four is, Understand Your Tax Rates. What we’re talking about here is, throughout retirement, as different income and expenses kick in, your tax rate may also be changing. One of the things we often see happening, is people retire, and then they elect to take Social Security benefits right away at age 62, as soon as they’re eligible. At the same time, they’re delaying taking money, out of their retirement accounts. What they don’t really understand is that you might have a few years early on in retirement where you have these low tax years. Sometimes pretty low, depending on your situation. We look for those low tax years and we can start to implement some tax strategies. One of the strategies is to delay Social Security benefits a little bit longer to fully maximize or to get a better Social Security benefit. Maybe it’s a Roth conversion. So during those low tax years, we look at shifting some money from a taxable traditional retirement account into a Roth retirement account and take advantage of those low tax years. Understanding where those tax rates may change from one year to the next is very important.

Number five is Understanding Your Required Minimum Distributions. If you don’t know it already, at age 70 1/2, the IRS makes you take out what are called Required Minimum Distributions (RMDs) from your traditional retirement accounts. If you don’t understand what those are, people can get blindsided by them. It ties into number four, Understanding Your Tax Rate. If you’re delaying taking money out of your retirement accounts, and suddenly at age 70 1/2 the IRS is forcing you to take a bigger chunk out, it could push you up into a higher tax bracket. Another thing it could do, is force your Medicare expenses to go up, because your Medicare premiums are tied to your income. So understanding what those required minimum distributions are, by doing a little preemptive planning, is going to be very important to optimizing those retirement resources.

Sixth is When To Collect Social Security. Looking at ways to not only maximize Social Security, but understanding how that fits into your overall cash flow situation, what it’s doing to your tax rates, and what it may be doing to some of the other components of your retirement is very important and your financial plan should be able to map that out.

Finally, number seven, Looking At “What If?” Scenarios. Retirement has a lot of variables going on and it’s all about trade-offs. As you’re going into retirement, you may be thinking about things like, maybe we should downsize our house, and how does that play out within our retirement plans? If we reduce the expenses on our house, can we retire a little bit earlier? Can we have a bigger budget for traveling? What if one of us passes away and we lose part of our retirement income? How does that play out? Being able to run those “what if” scenarios is going to be a big factor for doing not only some planning but also doing some stress testing of your retirement plans, as well.

What I Do

I help individuals make the transition from working to retirement.

As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.

My goal is to help you get the most out of your retirement resources. I do this by coordinating and optimizing what I call the 7 Core Elements of Retirement Planning.

It all starts with a plan!

We use advanced financial planning software to help you understand your retirement cash flow so you know where the gaps are.

Understanding your retirement gap is the foundation to getting the most out out of your retirement resources and avoiding costly mistakes.

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