The Financial Planning Blueprint

Author: Sam Maness, JD CFP®

McLaren Wealth provides detailed financial planning, investment portfolios, and legacy planning services for families and working professionals. We help them buy vacation homes, send kids to college, and build & manage retirement portfolios to provide income for a lifetime. What are you working towards right now? What are your dreams for the future? And what is your game plan for making those dreams come true? Whether you have $10 dollars, or $10 million, investment principles and financial planning best practices largely remain the same. In my experience as a certified financial planner™ professional, here are some of the time-tested strategies that work.

Investing

Amazon founder Jeff Bezos famously said that knowing what won’t change in the next 10 years is more important than knowing what will change. What won’t change when it comes to investing?

Human progress will bring new innovations and higher productivity. Time marches on, and stock prices rise as the world improves.

On any given day, the market will place a price tag on stock ownership, but prices should only matter if you are buying or selling. At times, those prices will be unreasonably low or unreasonably high. One of our greatest weapons is silencing our emotional response to both.

If you place enough bets, the casino always wins. Some stocks will produce substantial returns, but many more will fail. It is impossible to consistently pick the winners. In most casino games your odds of winning are less than 50%. Over a single day, your odds of positive stock market returns are slightly better than 50%. But since 1926, the S&P 500 index total return has been positive over 75% of the time for rolling one-year periods, and over 87% of the time for rolling five-year periods [https://us.dimensional.com/perspectives/the-uncommon-average]. With stock investing, your odds of “winning” improve with time.
1. You can be the Gambler by using leverage, attempting to time the market, or chasing popular stocks or trends.
2. You can be the Casino by staying invested in diversified stock funds.
People will continue to pitch ideas that sound like “easy money” – but if it looks good to be true or sounds too complex, approach with caution. Risk and return almost always move in tandem. These schemes rarely end well for private investors.

Using these ideas, investors can develop a low-cost, long-term, and tax-efficient global investment strategy. Most investors ask: What does that look like? How can we plan today for an unknowable future? How do I invest when there are competing priorities like travel, college savings, and retirement? Change is constant. Consider designing a dynamic portfolio approach:

Short-term reserves: set aside some money in cash or conservative investments for emergency reserves. Many suggest holding enough to cover between 3 to 12 months of ongoing expenses, but this also depends on your situation. Families with a single income, or variable income, face bigger risks and may want to hold additional reserves.

Retirement savings: decide on your income goal for retirement, use history to guide investment return assumptions, and then determine an appropriate level of ongoing savings to meet your retirement goals. Be an optimist and think about using diversified stock funds. Patience and discipline are key. Consistently saving 10% to 20% of your salary is a strategy designed to help you ‘win’ the retirement game one month at a time.

Financial freedom portfolio: true wealth is a life well-lived, and this means covering more than just emergencies and our retirement years. Living well could mean waterfront vacation property, traveling the world, or a new business venture. For others it is more time with loved ones, passion projects, charitable giving or protecting future generations. These goals require an investment portfolio capital positioned with a balanced approach and flexible fixed time horizon to cover a range of possible outcomes and expenditures.

I believe a diversified portfolio of low-cost and tax-efficient stock and bond funds checks all the boxes. This measured approach offers the opportunity for positive returns and reasonable capital preservation, plus the liquidity you need to quickly convert these funds to cash and make your dreams come true. Here you can learn more about risk and return for a diversified portfolio of 50% stocks and 50% bonds.

These buckets are competing for the same dollars, so one of the great challenges of financial planning and investing is deciding where to focus our efforts. This is when partnering with a professional advisor makes a world of difference. By reviewing options and exploring your goals, we can intentionally focus our efforts on what will best serve you and your family. I wrote more about this in a short story on money, happiness, and the choices we make in pursuit of both

Financial Planning

Budgeting: is often an important first step in the process. One effective approach is dividing up your fixed and discretionary expenses using two bank accounts. The first account receives enough money to cover your fixed monthly costs (housing, utilities, insurance, and savings). These bills are drafted automatically or paid by check. The second account receives the remaining balance of your paycheck for groceries, travel, entertainment, repairs, and all other expenditures. You can use a debit card and easily see the ‘choices’ you are making with your money. You can work to limit expenses if spending is too high; you can reward yourself if spending is lower than expected. This straightforward system is effective for families and couples with shared finances who want to improve their money conversations.

Balance sheet and cash flow: traditional financial statements are used by almost every business to stay organized and make strategic decisions. Private investors should do the same and work to better understand the family assets, liabilities, and cash flows by tracking net worth and effective savings rate over time. This can easily be done with a spreadsheet or digital program. The more difficult step is using that data to make meaningful decisions for you and your family. There is a saying that ‘if you don’t know where you’re going any road will get you there.’ What road are you on right now, and where do you want to go? This is the work of real financial planning.

Retirement: most of us work hard and save money with the idea that one day we can ‘retire’ – a word that has a different meaning for each of us. A key question is how much income do you think you want/need in retirement? The ‘4% rule’ is an easy way to think about your starting target. A lot of studies show that a 4% portfolio withdrawal rate is sustainable over longer time horizons. If you want $60,000 per year and expect to receive $20,000 from Social Security, the investment portfolio needs to provide $40,000 each year. The 4% rule says you should target $1MM in today’s dollars for your retirement portfolio (net of taxes). Note, in today’s dollars means adjusted for inflation; $1MM in today’s value may require $2MM or more in ‘future’ dollars when you retire.

Student loans: Without going over the many programs and plans available for student loan repayment, the question I hear most often is should I focus on investing for retirement or paying off my student loans? Prioritizing debt repayment is preferred in most cases (higher tax rates may shift the balance in favor of tax-deferred retirement savings for a select group). Debt reduction increases your net worth and buys you more freedom for the future. If you have loans with a 5% interest rate, your investments need to earn 5% or more before you start seeing any financial advantage. Investment also comes with the risk of loss; the student loan interest rate is guaranteed. I frame student loan interest as a “guaranteed return” on your money.

Taxes

The little decisions we make can add up significantly on our tax return. The challenge is identifying those decisions ahead of time and building a forward-looking strategy to capture the available benefits. Strategies may include:

Running a tax projection for the upcoming year to better understand future liabilities.
Buying tax-efficient investments in your portfolio and working with an advisor who can help control the recognition of gains and losses.
Using retirement plans, family gifting, 529 college savings accounts, and charitable strategies to reduce your taxable income.
Using investment gains and Roth IRA conversions when appropriate to increase your taxable income and effectively use the tax brackets with the lowest rates.

Estate & Legacy Planning

Every investor needs a fluid and effective plan to protect themselves and their loved ones. Think of this as your chance to ‘call the shots’ on who (1) receives your financial capital, (2) takes care of your children, and (3) makes medical or financial decisions on your behalf. This may seem a daunting task but there are great lawyers out there who will develop a straightforward plan and be your ‘family attorney’ at a reasonable cost. I wrote a guide on estate planning to get you started.

Insurance

Disability insurance: protects loss of income if you lose the ability to work. It is nice to have between 50% and 80% of your current income if offered through your employer, but often private plans are prohibitively expensive and make obtaining coverage on your own more difficult. Balancing risk vs. cost is a challenge when it comes to disability and other forms of insurance.

Life insurance: is a risk management tool to protect your loved ones if something happens to you. Level premium insurance provides affordable coverage designed for maximum leverage of premium dollars. In other words, a fixed payment providing level coverage for a set number of years ($750 annual premium for $1MM of death benefits covering 30 years). Recommended coverage varies based on personal factors. Many industry studies cite broad rules like “7X-10X salary” or use an income replacement ratio based on time horizon to retirement. Insurance salesman are great at pitching more complex strategies. But my advice, shared by many other financial planners, is that life insurance is not for saving.

Health Insurance: is complex and constantly changing. Be sure your plan covers your needs and controls costs. Often, the choices are limited. If you have preferred providers or specific needs, spend time to truly understand your plan options. If available, I always advocate using a Health Savings Account to fund future medical expenses, save for retirement, and lower your tax bill. This article illustrates the triple tax benefit of Health Savings Accounts.

Thanks for reading.

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Opinions expressed are those of the author and not necessarily those of Raymond James Financial, Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Links are provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Securities offered through Raymond James Financial, Inc. Services Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. McLaren Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.