Financial Planning 101

Find a Financial Planner You Trust

Financial planning is more than just saving for retirement.

Different goals throughout our lives require different methods of planning.

As part of our Financial Planning 101 print and video series, The Business Journal caught up with Jonathan Lapine of W3 Wealth Management and asked him common questions about financial planning.

Everyone should have a financial plan, but what exactly is a financial plan?

Jonathan Lapine: A financial plan can mean a number of things that range in their specificity. The most common definition is a projection that reconciles your financial goals – retirement, leaving an estate, paying for children’s college – with your means – expected income, Social Security and pensions, retirement or after-tax investments – to give you an idea of whether you will be able to achieve those goals.

There are a variety of planning methods, but the best practice today is known as a Monte Carlo Simulation, which uses market simulations to project a percent of success out of 1,000 lifetimes.

While the simulation is generally the heart of a financial plan, a plan can often address other questions about claiming Social Security, developing an optimal tax strategy for investments and withdrawals, and understanding and organizing risk across various investment accounts.

Financial planning can also ensure that appropriate risks – long-term care, death, disability – are mitigated, aid in organizing an estate and other scenarios that give people comfort that they know where their unique financial path leads.

When should I consider when I create a financial plan?

Lapine: Throughout most phases of life, there are financial goals that adults set their sights on. A young adult just out of college may want to know how much he should save in his retirement plan at work so he can retire as early as possible. A family with young kids may want to know how much to set aside to cover college costs and how best to do that. There’s generally a prevailing reason to regularly maintain and update a financial plan through most phases of life.

What are the most sensitive assumptions made in a financial plan?

Lapine: While every financial plan (and life) is different, there are common trends as they relate to assumptions that move the needle the most. Typically, desired spending in retirement is the most sensitive assumption in a plan. Many clients are surprised when they run a simulation that spends $500 per month more and see their plan go from wildly successful to failing. That $500 per month is $6,000 a year, and often subject to 3% annual inflation and compounded over 30 years. It certainly can add up. Another big driver is retirement age. Retiring a year earlier means you’ll spend your money a year earlier and eliminate what can often be a year of a large retirement plan contribution.

I think I had a plan done a while ago. Is it still good?

Lapine: From our experience, reviewing a financial plan only once is not a valuable exercise. Life changes, goals change and people change. A financial plan is designed to adapt to your life over time and serve as a filter you can use when making life decisions. We suggest at minimum reviewing the financial plan every one to two years to ensure the assumptions remain accurate and you haven’t veered off the path.

Additionally, software for the financial planning industry is constantly changing and becoming more sophisticated. If not having the plan is the equivalent of never checking the weather, then linear planning is the 15-day forecast, Monte Carlo simulations are the three-day forecast, and using the newest software could get us to the two-day forecast.

But what if I just want someone to suggest an investment for me?

Lapine: Planning can certainly be done generically. But the quality of the investment recommendation correlate directly to the amount of information known by the adviser about you, and more specifically how the assets will be used in your life. Savvy investors can garner additional return by being intentional. Not just about how much risk they are taking overall, but where the risk is being taken.

Longer-term accounts can generally tolerate more risk than shorter- term accounts. Having a game plan for when you will deploy your accounts may allow for a more aggressive allocation in certain instances, and a more volatility-focused allocation in accounts taking withdrawals while keeping overall risk in line.

My spouse isn’t interested in the finances. Do he or she need to be involved?

Lapine: From our experience, discussing life goals can be an enlightening and therapeutic process for a couple. Oftentimes, the less interested spouse is generally glad he decided to participate. While some meetings with your financial planner can get detailed and cover what’s happening in investment markets (which may not interest everyone), the meetings to develop the financial plan and discuss the results are all about you and how you desire your life to play out. It is also valuable for the less interested spouse to build a relationship with the financial planner in the unfortunate event of the early death of his or her partner.

I don’t have a relationship with a financial planner. What should I look for in a financial planner when interviewing them?

Lapine: Trust is the most important component to a good relationship with your financial planner. You’ll want to be confident that the person sitting across the table is competent and has your best interests in mind. We also strongly advocate for the Certified Financial Planner designation. Many don’t realize how difficult that designation is to attain, and the requirements that exist to maintain the annual certification (including continuing education).

Another consideration could be the age of the financial planner. Some people seek out experienced individuals while others gain comfort in knowing that the planner is young enough to likely be around 20 years down the road as the plan plays out. Today it’s common for planning firms to develop teams that pair experienced planners with younger ones.

How do you start the process?

Lapine: The hardest step to building a financial plan is generally the first. Finding a financial planner you trust and feel comfortable guiding you through the process is key. Once that relationship is established, it’s the dreaded information gathering time. Generally, the planner will ask you to fill out a questionnaire (or fill it out with you) that gathers key details. These include Social Security and pension information, income, investment and insurance details as well as life goals, desires and worries. Good planners operate under the premise of “garbage In, garbage out” – that’s to say, the quality and accuracy of the information will dictate how reliable the result is.

Once all the information is compiled, the planner will generally enter it into a software program and then discuss the results with you.

The opinions are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources. No representation is made to its completeness or accuracy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Fee-Based Planning offered through W3 Wealth Advisers LLC – a state registered investment advisor. Third-party money management offered through Valmark Advisers Inc., a registered investment adviser. Securities offered through Valmark Securities Inc. W3 Wealth Management and W3 Wealth Advisors are separate entities from Valmark Securities and Valmark Advisers.

Published by The Business Journal, Youngstown, Ohio.