Goal setting is at the heart of financial planning and, yet, frequently one of those goals has the potential to undermine another one. Consider a few common examples:
Scenarios like these create an inherent tension within the planning process. There is no straightforward, black-and-white answer for solving for these types of objectives. Instead, you need to further clarify two things:
- I want to retire as soon as possible, and I want to pre-fund my children’s college education costs.
- I want to gift appreciated stock for tax purposes, and I need to grow my net worth to become financially independent.
- I want to transition my business to my child, and I need income from the business to continue to finance my lifestyle.
Understanding What is Possible There’s a type of catch-22 in planning and it goes something like this: Advisor: You said you want to buy a vacation home on the beach. When would you like to make that purchase and how much will it cost? Client: I don’t know. It depends on what I can afford. Advisor: You want us to help you figure out when you can afford to retire. To do that, we’ll need to know how much you plan to spend on a monthly basis? Client: I don’t know how much I’m spending and much of that is changing anyway now that the kids have moved out. This reveals a situation where the advisor needs specific information in order to create the plan, but the client is working with the advisor in order to determine those specifics. In other words, the client doesn’t know what she wants because she doesn’t yet know what’s possible. The advisor is unable to model scenarios because there are too many variables. At this point, a more inexperienced advisor will often insist on having certain specifics in order to create the plan:
- What is possible
- What is most important to you and your family
The more experienced advisor, however, is more comfortable with the uncertainty and ambiguity at this stage. While realizing that these details are important, he will not insist on having all of this information upfront since the client is still unclear on these details. Instead, the planning will done collaboratively so the client can see the effects of choices on other aspects of the plan. The Nature of Planning The main difference between the experienced advisor and the inexperienced one is the way in which they view comprehensive planning. Planning should be viewed as adaptive and iterative; not static or linear. Because so many of the variables are dependent on one another, it is important for the advisor to show the client how those changes will impact the plan. The word “discovery” is overused and often misused, but this is what real discovery means. It is a clarifying process which helps a person learn the impact of different decisions and then begin to prioritize and map out the best path forward. Financial planning and wealth management is like a puzzle where all the pieces need to fit together. Decisions cannot be made in isolation precisely because there are times when goals are at cross purposes with each other. What’s Most Important Effective financial planning recognizes another simple truth about puzzles: the most important piece of a puzzle is the picture on the top of the box. Read this article for further explanation of our thinking on this. So then, what does your “picture on the top of the box” look like for you? As you begin to clarify what the next phase of life looks like to you, it will become easier to put numbers in place and prioritize competing objectives.
- Complete a budget worksheet
- Provide specific details for each financial goal
- Tell us the timing and amounts of each gift you plan to make