The Four Pillars of Financial Life Planning
Did you know that 58% of Americans think their financial
planning efforts need improvement, and 38% have done nothing at
all to get ready for their financial future (Source:
Northwestern Mutual Planning and Progress Study, 2015)?
And these numbers are probably a bit low, given that most people aren’t really sure what a comprehensive financial plan is or what it includes.
Today I want to walk you through The Four Pillars of a Comprehensive Financial Life Plan and some key questions they answer.
1. Financial Independence/Retirement refers to that point in time when you don’t have to work to earn money to support yourself. You can live comfortably off the wealth you have accumulated and decide what you want to do with your time. Key questions:
- Will I run out of money when I’m old and can’t do anything about it?
- When can I retire, or pull back/change jobs and do something I want to do at a reduced salary?
2. Investments are the assets you have accumulated, such as cash, stocks, bonds, mutual funds, real estate, and so forth. The proper selection and management of your investments is key to your Financial Independence, and this should also line up with your values. Key questions:
- How can I keep up with taxes and inflation over time?
- Which types of accounts can help me meet my goals for financial independence?
- Which types of investments can help me meet those goals?
- Are there certain companies or industries I do or don’t want to invest in?
3. Risk Protection is your defense against the things that can go wrong in your life, and potentially derail your best-laid plans. We usually cover these risks with insurance: protecting our lives, insuring our income against disability and illness, and helping us cover the ever-increasing costs of long-term care. Key questions:
- If I die early, will my loved ones be able to afford all the things I want for them (comfortable lifestyle, college, weddings, etc.)? Will they be able to stay in our home?
- If I get hurt or very ill, will we be able to afford all of the things listed above? What happens if I have significant medical bills added onto those?
- Will I become a burden on my children or other loved ones when I get old? Will I have enough money to pay for the care I need?
4. Estate Planning includes all the legal documentation to ensure that you get to decide what happens to you and your property. A basic estate plan will include your will, a financial power of attorney, a health care power of attorney, and a health care directive/living will. Key questions:
- Who will take care of my kids if I die early (if relevant)?
- Who decides what happens to me and my assets if I can’t make those decisions myself?
- What will happen to my assets when I die?
- Will my beneficiaries have to sell off assets to pay taxes when I die?
- How can I pass on a meaningful legacy to my heirs, including any charities or organizations I would like to support?
And of course there are plenty of other questions to be covered by a truly comprehensive financial life plan. This is just a primer on four key areas, but your plan should be tailored to you and address every area which applies to you.