What is Financial Planning?

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    Marla R. Chambers, CPA, CFP®
    Senior Financial Planner

    The CFP Board defines financial planning (as it applies to CFP® Professionals) as, “the process of determining whether and how an individual can meet life goals through the proper management of financial resources and integrates the financial planning process with defined financial planning subject fields.” Financial planning begins with identifying your life goals and then determining how and whether you can meet those goals through a defined process.
    The six financial planning subject fields include Investment Planning, Retirement Planning, Education Planning, Tax Planning, Estate Planning and Insurance Planning.


    Through investment planning, an appropriate asset allocation for diversification is matched with a suitable investment risk, considering the investor’s risk tolerance and how soon he or she needs distributions from the account. Everyone needs an emergency fund from 3 months (for single earner households) to 6 months (for two earner homes). The emergency fund should be held in a liquid savings account. Other types of long-term investment accounts, such as your retirement accounts and taxable investment brokerage accounts, that will not be needed for possibly 10 or more years can hold a significant percentage of equities that are tied to the stock market.


    Retirement planning entails planning for the gap between your pension and/or Social Security benefits and your actual cash needs. If you are only eligible for Social Security benefits, these benefits may replace only 25% to 40% of your pre-retirement earnings (the higher your earnings, the lower the percentage your Social Security will provide). Always contribute at least enough to your company’s retirement account to take full advantage of your Employer Match, then increase your retirement savings with each raise. Consider contributing to a Roth 401k if available through your employer. This will give you tax-free income in retirement. Also consider contributing to after-tax brokerage accounts to draw from in retirement.


    It is important to begin planning as early as possible to assist with college costs for your children. As soon as your child (or grandchild) is born, you may establish a 529 Plan within your state (Ohio’s plan is at www.collegeadvantage.com). Then, let your brothers, sisters, aunts, uncles, parents, grandparents know that the 529 is available to make contributions. Instead of purchasing the child several toys at Christmas and birthdays, encourage your relatives to contribute a portion of their gift to your child’s 529. Ohio provides a state income tax deduction up to $4,000 per year per child for residents who contribute to their Ohio 529.
    We suggest that parents set up other types of funds in addition to 529 plans to provide flexibility for assisting with the child’s education costs, if the child does not go to college or does not need the full amount saved for college. Roth IRAs held in the parent’s names can be used for education costs without incurring a penalty. Roth IRA distributions at retirement are not taxed; but if used for education purposes before reaching age 59 ½, the growth and earnings distributed from the account will be taxed. A parent can also establish an Ohio UTMA (Uniform Transfer to Minors Act) account and designate a custodian for the minor until he or she reaches age 25. The funds will be the child’s when he reaches the designated age and can be used for education or other purposes.


    The Tax Cut & Jobs Act that was passed in December 2017 was the largest tax law change since 1986. Because of the new tax law, individual income tax rates were reduced by 3% or more. Most Americans will pay less total tax this year, but the Federal GAO estimates that 21% of taxpayers will be under-withheld in 2018. This is due to the payroll tax schedules underestimating the amount of tax due. We suggest that you ask your financial planner or tax accountant to do a tax projection for 2018 to determine if you are going to have enough taxes withheld.
    Effective tax planning should consider the current year’s taxes as well as future tax consequences of the current year’s decisions. Keep in mind that you will eventually pay tax on contributions to your tax-deferred accounts (such as 401ks, 403bs, Traditional IRAs). The tax rates are now historically low, so it may benefit you to contribute more to after-tax accounts (such as Roth 401ks, Roth IRAs, brokerage accounts) so that when you retire you will have investments to draw from that will not create taxable income.
    As part of the Tax Cut & Jobs Act, the standard deduction was raised to $12,000 (single) and $24,000 (married filing jointly). If your amount of itemized deductions hover around the standard deduction amount, you may want to consider bunching your itemized deductions every other year by prepaying your January mortgage at the end of December and prepaying Charitable contributions to qualify for itemizing every other year.


    Estate planning should be your number one priority when doing financial planning. It is important that you provide for minor children by appointing a guardian for their care and a custodian for their inherited assets. We suggest that you discuss the essential estate documents with your planner and attorney – Will, Durable Power of Attorney, Health Care Power of Attorney, Living Will and potentially a Revocable Living Trust.
    You can also avoid probate through beneficiary designations (primary & contingent) on your life insurance policies, retirement accounts, HSA accounts, etc. Also, you can make Transfer on Death designations on checking and savings accounts, individual investments, Titles and Deeds.


    You should purchase life insurance to match specific needs. If you need a higher amount of life insurance to cover your mortgage and provide for minor children until they reach a certain age, you can likely do this with term insurance. To cover the costs of funeral expenses and other final expenses, you may need to consider a permanent policy.
    It has been said that the most valuable asset that you own is your ability to make a living. To insure this asset, you need to make certain that you have enough disability insurance.
    A Personal Liability Umbrella Policy (PLUP) is inexpensive (compared to many other policies). If you have a minor in the home, you will be held responsible for his or her actions. If you have an automobile accident that causes death or permanent injury, you could lose much of your wealth if sued. A PLUP insures for these extreme cases.
    Other types of insurances that you need to consider when managing your risk are business liability insurance, long-term care insurance and property insurance.
    Please feel free to contact a financial planner at Buckingham Financial Group to schedule a meeting to discuss your financial planning needs. Call (937) 435-2742 to schedule an appointment today.