What Is Financial Planning?
Key Points – What Is Financial Planning?
- The Definition of Financial Planning According to the Certified Financial Planner Board of Standards
- The Four Financial Planning Components: Risk Management, Taxes, Estate Planning, Investment Management
- To Answer the Question, What Is Financial Planning, You Need to Understand How the Four Components Work Together
- The Differences Between a CFP® Professional and a Financial Salesperson
- 15 Minutes to Read | 34 Minutes to Watch
What Is Financial Planning?
What is financial planning? This week, Dean Barber and Bud Kasper define financial planning and its components, from taxes to investments.
How to Go About Answering the Question, What Is Financial Planning?
We’ve published countless articles and produced a myriad of podcast episodes, radio shows, and webinars over the years about financial planning. But believe it or not, we’ve never had a piece titled, What Is Financial Planning? Dean Barber, Bud Kasper, and the rest of our team figured it would be a good idea to change that.
To help answer the question, what is financial planning, we’re going to look at the Certified Financial Planner Board of Standards’ definition of financial planning and the four main components of financial planning—risk management, taxes, estate planning, and investment management. Whether you’re planning to retire or already retired, it’s important to understand that there should be a thorough answer to the question, what is financial planning?
What Is Financial Planning According to CFP.net
Let’s start answering the question, what is financial planning, by breaking down the Certified Financial Planner Board of Standards’ definition of financial planning below.
“Financial planning involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals. From saving for education and planning for retirement to effectively managing taxes and insurance, financial planners develop valuable relationships with their clients to provide them with confidence today and a more secure tomorrow.” – CFP.net
Unfortunately, there’s an insane number of people in the industry that call themselves financial planners but really don’t live up to that definition at all. In most cases, it’s because those people strictly focus on investment management and don’t cover the other three components—risk management, taxes, and estate planning. Those people should call themselves financial salespeople rather than financial planners because they’re not going to help you build a comprehensive financial plan.
“The CFP® Professional should be the quarterback for all these different components because each of the components affects the others.” – Dean Barber
An investment plan isn’t a financial plan, but rather a core component of a financial plan. More on that in a bit.
Proper Risk Management
As we answer the question, what is financial planning, we’re going to share the importance of each of the four main financial planning components in detail. Let’s start with risk management.
Risk management is at the foundation of financial plan. It includes things like health insurance, life insurance, disability insurance, property casualty insurance, and umbrella policies. All these insurances are ones that you should have and need to be reviewed often to make sure that you have the right insurance at the right price. This is one of the many points we review in our Retirement Plan Checklist that helps to gauge your retirement readiness, so make sure to download your copy below.
You don’t want to have something that you’re overpaying for. Insurance is about finding the proper coverage for your individual situation. In some cases, people can find themselves in a situation where they can be self-insured.
Nobody wants to have a lot of insurance premiums and things like that, but then again, you don’t want the risk on the other side. As Bud started to think about risk management while answering the question, what is financial planning, it dawned on him that he’s been a CFP® Professional for about 30 years. It’s important to him to be a CFP® Professional to help people understand that proper financial planning encompasses things like risk management and not just keeping an eye on the stock market.
“That’s why I’ve dedicated myself and our firm has dedicated itself to developing advisors who have the CFP® designation. We can dive in deep when looking at the big picture of financial planning. Again, foundationally, financial planning helps you mitigate the risk associated with car insurance, house insurance, etc. that people need to review to get the security that they want in their lives.” – Bud Kasper
Do You Need to Carry Life Insurance into Retirement?
When people begin the retirement planning process, there is one insurance that can sometimes be overlooked. That’s life insurance. Do you need to carry life insurance in retirement? Do you need to have a long-term care insurance policy in retirement? The way to answer that question is through the preparing a financial plan. You need to go through the entire process.
Then, stress test the plan to find out what would happen if you or your spouse needed to spend time in a long-term care facility at the average price in the area where you live. When you stress test the plan for that, did it survive? Was the surviving spouse OK? If the answer is yes, then you can say you’re self-insured. You have the assets to cover that expense.
Then the question becomes whether you want to self-insure. It’s not our place to make specific recommendations, but there are policies that you can buy that if you don’t use it for long-term care, the death benefit goes to your beneficiaries. It’s one of the only policies in the insurance world that allows a person to get more out of that policy than they ever paid into it. That might not happen while they’re alive, but it can then happen once they’ve passed on.
Let’s face it. We need insurance when we’re younger just to cover the tragedies that could occur in our lives. But when we’re nearing retirement, now we’re looking at the long-term care side of it. Finding policies that can do both at a premium level that’s acceptable for the type of risk that’s out there becomes a very important part of the financial plan. That’s why when we ask, what is financial planning, that risk management is a key piece of it.
We can’t answer, what is financial planning, without talking about taxes. Did you know that the IRS started accepting tax returns on January 24? You would know that if you downloaded our 2023 Retirement Planning Calendar. That’s one of many dates that’s important to know for your retirement planning, which is why we put this calendar together. Download your copy of the 2023 Retirement Planning Calendar below so that you’re aware of the many dates and events that can impact your retirement.
Did You Know Tax Rates Are Going Up in 2026?
Tax filing is what comes to a lot of people’s minds when they think about taxes. While tax compliance is important, that’s not what we’re going to focus on for the tax component of, what is financial planning? What significance do you think January 1, 2026, has for you? When first thinking about it, you’re probably not sure, but this is a critically important date from a financial planning aspect. It’s when we’ll go back to the tax rates of 2017, so tax rates will be going up. If you haven’t already read our article, Tax Rates Sunset in 2026 and Why That Matters, make sure to give it a read.
“It is a huge deal because there’s a tax increase coming for everyone in 2026 because the Tax Cuts and Jobs Act sunsets on December 31, 2025. So, we have just a couple of years left of these favorable tax rates.” – Dean Barber
Tackling the Importance of Tax Planning
This brings us right into why tax planning is so important. Tax planning is what our focus is on when we’re asking the question, what is financial planning? Too many people are paying more tax than they need to and don’t realize it. The goal of tax planning is to pay as little tax as possible over your lifetime, not just in a given year.
This is why we have in-house CPAs who work with our CFP® Professionals to look over financial plans from a tax perspective. People can miss opportunities to mitigate taxes because they’re so focused on their investments. Taxes and health care costs are the top two wealth-eroding factors for people in retirement.
When we’re talking about needlessly overpaying their taxes, it’s typically not because their tax return was done incorrectly. It’s because they missed opportunities that they didn’t know about. When you see all the TV commercials about filing your tax returns for free, you need to realize that all those companies are going to do is file your return based on the data that you put into the system. That’s tax compliance and reporting history.
Understanding Tax Diversification
If you live in the U.S. and have or make money, taxes are going to be a fact of your life. But you can control taxes during retirement unlike any other time in your life. It all has to do with what tax allocation you have set yourself up with leading into retirement. It’s critical that you don’t wait until you retire to start doing tax planning. You need to start tax planning well before retirement so that you have the right tax diversification to control your taxes even more throughout retirement. You can begin seeing how to do that by downloading our Tax Reduction Strategies Guide below.
Taxes Are No Joking Matter … But This Tax Brackets Joke from Bud Is Pretty Funny
Taxes are always a hot topic on America’s Wealth Management Show, The Guided Retirement Show, and the Modern Wealth Management Educational Series. However, it’s still amazing how many people don’t know that they’re paying taxes at different levels.
“You’re paying each of these taxes in tiers. I’m not talking about tears, t-e-a-r-s, which is what most of us do when we need to pay taxes. I’m talking about tiers, which are the levels of which the tax brackets increase.” – Bud Kasper
A Popular Time to Do Roth Conversions
Remember that we shared earlier that on January 1, 2026, the current tax laws revert to the way there were back in 2017. We need to plan around that. So, we’re going to be doing a lot of Roth conversions between now and December 31, 2025. That allows us to get out of a continuous tax issue by doing the tax planning strategies in advance and taking Uncle Sam out of your life for the rest of your life.
Using our Guided Retirement System, we can show you on an annual basis how much tax is going to be due based on how much money you want to spend. That’s when the magic happens with a CPA working with a financial planner to see what tax planning strategies will be most effective. Maybe that’s doing a Roth conversion. Maybe that’s contributing to a Roth 401(k) instead of a traditional 401(k).
“Everyone is going to have a different strategy straight no matter how they do it. There’s not a book that’s written that says, ‘Here’s how you reduce your taxes over a lifetime.’ It is a thing that is ongoing.” – Dean Barber
Taxes in Relation to Social Security and Medicare
So, as we’re answering the question, what is financial planning, hopefully you can see that it’s an art form. Things are going to change in your life, the economy, and the markets, so painting the picture of your financial plan is a continuous process.
A couple of the things that people miss regarding taxes involve Social Security and Medicare. Social Security can suddenly be taxed when it doesn’t need to be, and Medicare premiums can increase due to a lack of proper planning. That’s just another form of tax. People can struggle to understand that so many of the sources of income in retirement are taxed in different ways.
In our Claiming Your Social Security webinar, one of the examples we shared highlighted how someone can find themselves in a much higher tax bracket after taking $1 out of an IRA that causes 85 cents of their Social Security to become taxable.
This also made Dean think of a more recent example when he was looking at doing a Roth conversion for someone late last year. The amount that the individual wanted to convert would have caused a lot of Social Security become taxable. Therefore, it would’ve been very expensive to do that conversion. Doing a small Roth conversion, however, wasn’t going to cause Social Security to become taxable. That’s yet another example of why it’s important to step back and look at every person’s unique situation each time we meet with them.
We’ve covered risk management and taxes, so we’re halfway through answering our question, what is financial planning. Now, let’s shift our attention to estate planning. One of our loyal YouTube channel viewers, Thomas, recently had an estate planning related question for us, so we’re going to start our discussion on estate planning by answering his question.
Thomas’s Comment/Question: Hi Dean and Bud, I watch your shows often and others too, but nobody has talked about inherited accounts which happen while you could still get the Required Minimum Distributions for your whole lifetime (stretched). With the new rules from SECURE 2.0, can we still do that or are we supposed to take it out in 10 years now? I’m wondering about this for both Roth and regular inherited IRAs that are non-spouse.
Dean’s Answer: All inherited IRAs that were non-spouse IRAs prior to the SECURE Act can still be stretched over your lifetime. Any of the rules that were in place prior to the SECURE Act stay in place in since they’re all grandfathered in. It’s just inherited IRAs that were inherited after the SECURE Act came into play where the 10-year rule applies. The SECURE Act makes inherited IRAs one of the most confusing things that anybody is going to go through.
If you think that you’re going to inherit an IRA—from a parent or someone else—or you are going to leave money in an IRA to beneficiaries, watch our recent America’s Wealth Management Show episodes, Inherited IRAs and the SECURE Act and New Retirement Rules Passed by Congress. The SECURE Act is uber confusing. It’s easy to mess up things up with inherited IRAs. There could be a lot of potential for penalties if you get something wrong.
We’re Thankful for Our Good Friend, Ed Slott
Fortunately, we have a strong relationship with America’s IRA expert, Ed Slott. Every six months, Dean, Bud, and the other members of Ed Slott’s Elite IRA Advisor GroupSM review IRA rules in great detail. We have to have a good understanding how these rules could impact our clients in terms of the financial planning that we’re doing for them and the tax planning associated with that. While the SECURE Act has complicated a lot of things with IRAs, it’s also made financial planning that much more important.
Everyone Has an Estate
Inherited IRA rules and the SECURE Act have a big impact on estate planning, so they’re very important in our effort to answer, what is financial planning? Everyone has an estate, which is the value of your tangible and intangible assets. The value of the estate that passes to the next generation can be done in several different ways.
You can title assets properly in a pay-on death or transfer-on death type of manner, where it goes directly to the beneficiary without having to go through probate. You can go get a will done. And in your will, you can state where all your possessions go.
If all you have is a will, you guarantee that your estate is public. Everyone can see exactly what you had. Also, if you only have a will, you guarantee that your estate will be probated. That means you’re going to lose a percentage of your estate for a judge and an attorney to read the will and make sure that those things are distributed as you wanted them.
“Oftentimes, we think about estate planning in two different ways. There’s the estate planning for while you’re still alive. And then there’s estate planning for when you pass on money to the next generation.” – Dean Barber
Trusts Can Serve Two Different Purposes
Estate planning is unique to each individual. In the event you become incapable of making financial decisions, how do you make sure that you know that financial decisions are going to be made the way that you want them to? Well, you write them in a trust and you name a successor trustee for that trust that will follow the rules of the trust while you’re alive and incapable of making financial decisions.
You also have a durable financial power of attorney, health care power of attorney, and health care directives. The trust also says how you want your assets dispersed. Once you’re no longer living, the money goes to the next generation. When you have all your assets titled in the name of the trust, your estate is private and avoids probate. So, a trust can serves two different purposes—one for when you’re alive and one for when you’ve passed on.
“I would avoid this do-It-yourself type of trust that is out there. You really need to sit down with an attorney who focuses on this type of planning. The last thing you want is for your assets to go through probate. Then, it’s interpreted by a third party—a judge in this case— with an attorney likely present, and then you find out that your estate wasn’t distributed the way you wanted it to be.” – Bud Kasper
All too often, people avoid this because they’re talking about end-of-life situations. It forces people to think through how to get their wealth into the hands of people that they want to.
We also want to touch briefly on pour-over wills. Almost every trust will have a pour-over will. Think of it as the net underneath a trapeze artist. Everything is good if you’re getting things distributed through the normal means—beneficiary designations, trust designations, etc. If there was something that was missed, the pour-over will takes those assets that weren’t defined as to how they would be distributed and it distributes them. So, there are some supporter catches that are associated with pour-over wills.
“I’ve seen too often where an attorney will do a trust for someone, give them instructions on how to fund the trust, but then say that it’s OK to not get it funded because of the pour-over will. The attorney explains that the pour-over will ensures that everything goes into the trust when you die. However, the attorney won’t tell you that the pour-over will is just like a regular will and must go through probate.” – Dean Barber
So, if you don’t want your estate to go through probate, don’t rely on the pour-over will. Make sure that everything is properly titled in the trust and that all the beneficiary designations are properly done in your life insurance policies and IRA/401(k) accounts.
Hopefully, this has helped explain why estate planning is included when answering the question, what is financial planning? are something that we pour into as part of the overall financial plan. It’s not just the creation of a trust. It’s making sure that beneficiary designations and the like are all done properly.
For the fourth component of financial planning, we have investment management. Investments are usually the first thing that people want to talk about with financial planning, but those people oftentimes don’t understand the three other components.
If you start talking to someone in the financial services industry about how to invest your money and they start giving you ideas or telling you how great their investment techniques are before talking about the other three components, that should be a red flag. They’re not taking you through a comprehensive financial plan. If that’s the case, you’re not talking to a CERTIFIED FINANCIAL PLANNERTM Professional. You’re talking to a financial salesperson.
“You need to address every part of your financial life through a well thought out financial plan that has been reviewed by a CPA. Then, you can start talking about what investment structure should you put together to give you the highest probability of success of achieving your goals. And it’s not just your short-term goals, but your intermediate and long-term goals as well. You want to achieve those goals with the least amount of risk possible. The investment design for each individual is going to be different.” – Dean Barber
Thinking of Financial Planning as a Vehicle
Everyone’s financial plan is going to be different as well. Think of financial planning as a vehicle. Investment are like the fuel that makes the plan go. However, how well that vehicle drives still depends on tax planning strategies, estate planning, and risk management.
One of the things we do is risk analysis. This is a series of questions that determines an acceptable level of risk for your money that’s being invested. What amount of risk are you willing to tolerate? There’s no investment that doesn’t have some level of risk. Even U.S. treasuries and CDs carry risk. We’ve been seeing this of late in the form of inflation risk and interest rate risk. If you have a CD and a fixed rate of return and inflation outpaces the rate of return, you’re going backward.
There’s risk in the stock and bond markets as well. There’s more risk of volatility in the stock market. If you’re well diversified in the stock market, you’ll usually be more up than down over time. However, 2022 showed us that when risk is present, it can be terrifying.
Overcoming Fear and Greed with Your Investments
When it comes to your investments, having a financial plan can be critical with keeping your emotions in check. Two of the strongest emotions we have are fear and greed, and they can easily creep in when investing.
“Warren Buffett says it best. You want to be fearful when others are greedy and greedy when others are fearful. Make your decisions based on that. That’s overly simplistic, but if you have a financial plan and build your asset allocation in your portfolio the way that it should be, your financial plan will tell you your probability of success in achieving your objectives. Then, you can go into that financial plan and see whether a different asset allocation would improve or reduce your probability of success. You want to get to the highest probability of success with the least amount of risk. That’s what I call the Goldilocks portfolio, the one that’s just right for you.” – Dean Barber
Bud had the opportunity to meet Warren Buffett 12-13 years ago. Bud believes that he has taught America a lesson about investing. It’s hard not to be impressed by what Warren Buffett and Charlie Munger have done with Berkshire Hathaway.
“People don’t really understand risk until they’re into risk. That’s why we want to plan in advance. We want to create scenarios to get your reaction. We want to know whether we shouldn’t step over a certain line because of where your comfort level is. While investments are a single component of the financial plan, the other components can mitigate some of that risk associated with it. You’re effectively bringing in higher amounts of net income if you’re not overpaying in taxes, insurance, etc. That helps to answer, what is financial planning?” – Bud Kasper
Alternatives to Traditional Stocks and Bonds
When you’re thinking about investments, remember that there’s more than just traditional stocks and bonds. You can own rental real estate. When you own rental real estate, unless you’re willing to hire a management company that’s going to be very active, it’s going to be like a job. There could be some tax benefits for owning rental real estate as well.
There are also indirect investments into real estate and direct investments into private equity. You can participate in the ownership of private companies that aren’t public. All those things increase your diversification.
And for the first time in almost 15-20 years, we’re seeing some attractiveness again in the municipal bond market. There’s some opportunity there as well. The bottom line, though, is that when it comes to investing, you should have your financial plan completed first. It can truly help you answer our question of the day, what is financial planning?
Start Building Your Plan
We hope we’ve given you a better understanding of all four financial planning components. To get a true sense of how it all comes together, though, you need a financial plan. You can start building a plan that’s unique to you with our financial planning tool. You can access it from the comfort of your own home and at no cost or obligation by clicking the “Start Planning” button below.
And, if you have questions about how we’ve answered, what is financial planning, or how to build your plan, just let us know. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals by clicking here. You can meet with us in person, by phone, or virtually depending on what works best for you. The construction of a financial plan is what you need to have clarity and confidence about your financial life.
What Is Financial Planning? | Watch Guide
Introduction – Go Chiefs!: 00:00
Components of Financial Planning?: 01:30
Risk Management – Insurance: 02:58
Tax Planning, Not Prep!: 07:19
Answering a Viewer Question: 16:56
Estate Planning: 19:15
Resources Mentioned in this Episode
- Starting the Retirement Planning Process?
- Tax Rates Sunset in 2026 and Why That Matters
- 7 Reasons Why Tax Planning Is So Important
- What Is a Monte Carlo Simulation?
- Stress Testing Your Financial Plan
- Inherited IRAs and the SECURE Act
- New Retirement Rules Passed by Congress
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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. 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.