5 Types of Financial Plans

Key Points – 5 Types of Financial Plans

Do You Have a Financial Plan or Just a Plan of Hope?
Why It’s Important to Have a Fluid Financial Plan
Things That DIY Financial Planners Can Miss
What a Comprehensive Financial Plan Consists of
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5 Types of Financial Plans

Going to the doctor for a checkup usually isn’t the most fun thing to do, but it’s necessary so that you’re up to date on your health situation. The same can be said about meeting with a financial planner to find out where you’re at with planning for retirement. Let’s review five types of financial plans and how a comprehensive approach to financial planning is critical to getting to and through retirement.

Rundown of the 5 Types of Financial Plans

No Financial Plan (A Plan of Hope)
The Set-It-and-Forget-It Financial Plan
Your “Average” Financial Plan
The DIY Financial Plan
A Comprehensive Financial Plan

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Completing Your Estimated Payments

1. No Financial Plan (A Plan of Hope)

The first type of financial plan on our list is not actually having a financial plan in place. This is what some of our advisors at Modern Wealth refer to as having a plan of hope. According to Schwab’s 2023 Modern Wealth Survey, only 35% of Americans have a goals-based financial plan.₁ It’s something that we see a lot from prospective clients, but do you really want your financial future to be based upon hope?

Some people might think they can’t retire until reaching their full retirement age for Social Security or until they become eligible for Medicare. That simply isn’t true.

Let’s say you’re in the 45-to-55 age range and think you want to retire within the next 10-15 years. That doesn’t mean that you shouldn’t start planning for retirement until you’re a couple of years away from when you want to retire. There is a lot of planning that goes into your retirement, and it isn’t just from a financial perspective.

Attaining Financial Independence

Yes, saving for retirement and understanding things like how different types of income are taxed are very important. But how can you know how much you need to save for retirement if you haven’t thought about your goals for retirement?

Think of retirement as being financially independent. That’s when you’ve reached the point of doing the things you want to do, when you want to do them, and not being reliant on a paycheck. You can save and save and save, but it can be difficult to know when you can stop saving without the clarity that a financial plan can bring. What if you could retire earlier than you anticipated and didn’t even know it? That’s a distinct possibility if you don’t have a financial plan.

2. The Set-It-and-Forget-It Financial Plan

Next up is the set-it-and-forget-it financial plan. A lot of people want to say that they’ve done all they need to do—or all they can do—and think that should be enough. It might be even easier for people to think that after a strong year for the stock market in 2024. But you can’t expect every year to be like 2024 over the course of your retirement.

If you retired today, would you be OK financially if another market downturn like the Dot-Com Bubble, Great Recession, or a year like 2022 where the stock and bond markets both saw double digit negative returns? Prolonged market downturns can quickly show fallacies of not having a financial plan or having a set-it-and-forget-it financial plan. When our team builds a financial plan for a perspective client, they stress test the plan to see if it could survive those type of economic events. Download our Retirement Plan Checklist to see other examples of stress testing.

Retirement Plan Checklist

Do You Have a Target Date Fund?

Many people utilize Target Date Funds (TDFs), which serve as a long-term investment account that are oftentimes offered as a part of employer retirement plans. TDFs are typically structured to invest heavier in growth stocks at first, but as you’re approaching a significant milestone such as retirement, they’ll shift toward a more conservative investment approach such as bonds. One perk of TDFs is that there is a portfolio manager that will rebalance your TDF for you, but that doesn’t mean that you should ignore it until you get close to retirement.

If you have a TDF, it’s important to understand its allocation glide path. Does it have a “to” glide path, where the management of the allocation ends at a specific date or a “through” glide path where it continues after the target date has been reached?

Also, keep in mind that your asset allocation isn’t the only thing that could change as you’re approaching and going through retirement. Your goals could very easily change as well. If you take a set-it-and-forget-it approach with your financial plan and your goals change, do you think your financial plan will be very effective? We encourage you to have a fluid financial plan that’s tailored to your goals. That’s another reason why it’s important to begin planning for retirement around 10-15 years prior to retirement so you can think about what you want your retirement goals and lifestyle to look like.

3. Your “Average” Financial Plan

The set-it-and-forget-it financial plan and “average” financial plan are kind of similar. But let’s discuss what an “average” financial plan looks like. Many people think an average financial plan and an investment plan are the same thing. However, an investment plan is actually part of a comprehensive financial plan, which we’ll discuss more in depth later.

An ”average” financial plan might consider your goals for retirement, but if you’re married, does it incorporate your spouse’s goals? “Average” financial plans might adequately cover your plans for retirement but might not consider any legacy goals that you have.

Another thing our advisors sometimes see from prospective clients who say they already have a financial plan is that they’ve built their plan based off rules of thumb and what their friends have told them about their respective plans. That’s great if your friends have built plans that are tailored to their goals, but even if you and your friends really get along well, you won’t have identical goals for retirement.

Also, if you already have a financial plan, who built it? If you’ve been working with an advisor who only talks to you about investments, they may be more of an investment salesperson rather than a financial advisor. If you are working with a financial advisor, that’s great. But consider this—do you trust one financial advisor to be responsible for managing your investment, tax, estate plan, and insurance needs? Those are some of the components of a comprehensive financial plan.

That can be a lot to handle for an “average” or even “above average” advisor. And that’s exactly why we have a team of wealth management professionals at Modern Wealth Management.

4. The DIY Financial Plan

Let’s shift gears now to the DIY (do-it-yourselfer) financial plan. We commend those who have taken the time to build their own financial plan, but let’s review some of the things that could go wrong with that approach. Some DIYers tend to have a general goal of making sure their rate of return stays up enough so they don’t run out of money.

While that is important, your rate of return isn’t the only thing to focus on so that you don’t live longer than your money. These factors need to be considered as well.

Risk
Taxes
Inflation, Interest Rates, and Economic Health
Time
A Life Plan with Goals for Retirement

We mentioned earlier with set-it-and-forget-it financial plans that they can be problematic when prolonged economic downturns arise. Well, you’re hopefully well aware that high inflation has been a challenge for many people worldwide, even though it has cooled considerably from its peak in 2022.₂ If someone with a DIY financial plan only used a 1% or 2% inflation factor across all their expenses, they probably weren’t feeling very good about their plan for much of 2021, 2022, and 2023. Additionally, it’s important to remember to apply different inflation rates to different expenses because there are things like health care costs that typically inflate at a higher rate.

Do You Use a Retirement Calculator?

If you have a DIY financial plan, have you been using a retirement calculator to determine how much you need for retirement and when you can retire? Before you enter any more numbers into a retirement calculator, think about all these things that retirement calculators can miss.

Insurance
Current Tax Rates Scheduled to Sunset After 2025
Debt Modules and Calculators
Medical Expenses
Social Security
Inflation
Required Minimum Distributions
Your Asset Allocation and Potential Returns
Your Personal Goals for Retirement

What’s Your Withdrawal Strategy for Retirement?

Additionally, you need to have a proper withdrawal strategy. What money are you going to spend and when in retirement? Let’s break it down to three tax buckets. There’s tax-deferred money, taxable money, and tax-free money. Let’s say that someone has most of their retirement income in a traditional 401(k). That is all tax-deferred money. You won’t be required to pay tax on that money until you access it. So, remember if you have $X saved in your traditional 401(k) that you haven’t paid any tax on it yet.

Let’s circle back to the second bullet point above. Under current tax law, tax rates are at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, those tax rates under the Tax Cuts and Jobs Act are scheduled to sunset after 2025. That means unless Congress steps in, tax rates will be 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% starting in 2026.

So, if you have most of your money in tax-deferred accounts and don’t plan to take that money out until after 2025, you need to understand that that income could be taxed at higher rates than what are in place today. That being said, Roth conversions may be a strategy to consider, especially in 2025. With Roth conversions, you’re converting funds from a traditional IRA to a Roth IRA. While you must pay tax on the conversion, that money will come out tax-free and penalty-free if you follow certain IRS rules. There are pros and cons to doing Roth conversions depending on your situation, so make sure to consult a tax professional prior to doing Roth conversions.

Roth Conversion Case Studies

Tax Compliance vs. Tax Planning

Some people hesitate about doing Roth conversions because they’re focused on trying to pay the least amount of tax possible in one year. At Modern Wealth, our team is passionate about forward-looking tax planning, which focuses on strategies like Roth conversions to potentially reduce taxes over someone’s lifetime. To review other examples of tax planning strategies, download our Tax Reduction Strategies guide.

Tax Reduction Strategies

5. A Comprehensive Financial Plan

If you have a plan of hope, set-it-and-forget-it financial plan, “average” financial plan, or DIY financial plan, we hope this article has shed some light on their potential fallacies. We want you to have a comprehensive financial plan.

Again, if your plan doesn’t incorporate your goals, you don’t have a comprehensive financial plan. A comprehensive financial plan should be tailored to your life and financial goals. Think about how much your needs, wants, and wishes will cost. One of the key components of a comprehensive financial plan is a spending plan.

How Much Do You Plan on Spending Each Month?

For instance, maybe someone wants to spend $10,000 net a month in retirement. That’s great. You have a general direction, but what makes that up? How much of that $10,000 is dedicated toward travel? What does health care cost? How much do you want to give to the next generation(s) and/or to charity? The first step is figuring out what you want to do.

For some people, $10,000 net a month might be plenty. For others, it might not be near enough. It all depends on your unique situation. No matter how much you need per month to get to and through retirement, remember that there’s more to consider than your investments. Along with investments, a comprehensive financial plan should consider taxes, insurance, and estate planning.

Working with a Team of Wealth Management Professionals to Build a Comprehensive Financial Plan

Some financial advisors might have a good understanding of how to build a comprehensive financial plan, but rather than depending on one advisor, why not work with a team of wealth management professionals that collaborates on your behalf? We’re ready to deliver you the Modern Wealth Advantage.

At Modern Wealth, our CFP® Professionals work alongside our CPAs, CFAs, estate planning specialists, insurance specialists, and company retirement plan team. To learn more about our team’s approach to wealth management and how to build a comprehensive financial plan that’s tailored to your goals, start a conversation with our team below.

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Other Sources

[1] https://pressroom.aboutschwab.com/press-releases/press-release/2023/Schwabs-Modern-Wealth-Survey-Reveals-Nearly-Half-of-Americans-Feel-WealthyBut-With-a-Twist-They-Dont-Measure-It-in-Dollars–Cents/default.aspx

[2] https://www.usinflationcalculator.com/inflation/current-inflation-rates/

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.