4 Reasons Financial Planning is Important Even If You Know You Have Enough Assets

There are many reasons why people should invest their time and energy in constructing a plan to meet family financial goals. Managing assets, ensuring a certain standard of living, and future financial security are just a few of the reasons you will commonly find in numerous articles written on this subject.

While these reasons are valid, they are also more relevant for those whose financial security, deep into retirement, needs careful consideration to ensure long-term success. For families that have a high degree of confidence that they have assets sufficient to meet financial goals, there is still considerable value from a professionally constructed and routinely monitored financial plan, including the following benefits.

Estate planning

In addition to evaluating your financial picture during life, it is equally as important to consider the legacy that you would like to leave to future heirs or philanthropic efforts. Beyond ensuring your wishes for wealth transfer are met, proactive estate planning can help minimize expenses and taxes, and more importantly, ease the burden for your family members or those organizations you wish to support.

To plan effectively, it is essential that you have a clear picture of your current financial condition as well as future projections. Financial planning creates this understanding, as well as uncovers potential opportunities to maximize wealth transfer tailored to your specific situation. For instance, a family with a child with special needs could benefit from creating a special needs trust to protect assets while not compromising their child’s ability to qualify for medical aid. Or, a family whose wealth is projected to grow beyond estate tax exemption limits could take advantage of lifetime gifting to reduce their taxable estate in the future.

By carefully considering your family dynamics, goals, and how they fit into your total wealth picture, you can ensure your hard-earned wealth remains preserved and protected for future generations.

Tax planning

Financial planning allows for careful analysis of both current and future projected cash flows, including associated annual tax liability. This knowledge can be used to craft tax mitigation strategies to help reduce overall taxes throughout your lifetime. For instance, an early retiree may have a period of significantly lower tax rates between their year of retirement and their social security claiming age, leaving room to realize tax-deferred dollars at a much lower rate if realized in the appropriate years. Or, an executive receiving a significant bonus or other large anticipated income flow could use a donor-advised fund to front-load charitable contributions (and associated deductions) in a higher earning income year.

A thorough understanding of both current and future projected cash flows can result in significant tax savings by being able to strategically time the realization of income and/or deductions to minimize individual tax liability.    

Risk management

A well-constructed financial plan should include a thorough evaluation of risk, both from an investment and liability standpoint. Going through the financial planning process enables you to uncover potential liability and risk exposures you may not have otherwise been aware of. For instance, if you are planning to use a secondary home as a rental income stream in retirement, you need to ensure you have the property in the appropriate entity structure. This will allow you to maintain protection of your personal assets in the event of an accident or lawsuit associated with the investment property.

In addition to liability, protection from catastrophic events is also an essential consideration. Besides understanding your current situation, it is crucial to understand how your plan would be impacted in the event of a death, disability or long-term care event. Financial planning can model these occurrences, as well as determine what type and amount of insurance coverages are appropriate to ensure your family assets are adequately protected.

Risk management also flows into your overall investment strategy. Appropriate asset allocation within an individual’s portfolio(s) should be driven by specific wealth trajectory goals, including time horizon, projected cash flows, required rate-of-return, and personal appetite for risk, all of which are uncovered through deep discussions in the financial planning relationship.

Coordination of professionals

As your wealth becomes more complex, it becomes necessary to have specialized advice from a multitude of service providers to meet your needs effectively. CPAs, estate attorneys, insurance specialists, and others all provide valuable expertise. But it is also possible that these professionals are implementing conflicting strategies because they do not have the full picture view. Developing a financial plan creates this holistic view, and enables your wealth manager to work in concert with your other professionals to ensure everyone remains on the same page and are all working towards the same common goal.

It should also be known that your financial plan is never set in stone, but rather a living document that should be routinely adjusted to accommodate changing wealth and family dynamics. And when well-constructed and professionally prepared – even for the highly affluent whose concerns about assets required to retire comfortably are minimal – such a plan can increase the effectiveness of your wealth today and tomorrow.