Financial decision making can often feel like a game of dominoes. Every decision appears to affect all the others and it’s difficult to know which decision to start with. You wake up one morning and think – “I’ve really got to get my stuff in order when it comes to money.” All your best of intentions have finally caught up with you and you’re going to do something about it this time. But where do you start? Do you figure out a way to save on taxes? Do you restructure your business? Do you get your will and trust in order because you’re going on vacation? You know you probably need to hire some good professional advisors, but which do you hire first?
These are all the right questions. We at Trilogy believe that the starting point for financial decision making is the financial plan itself. What we call the DecisionCenter. When you aggregate all your data in one place and then overlay your intermediate and long-term priorities, you can see the viability of various decisions and were potential risks may lie. This grid of information and guidance from your Trilogy advisor can then be a starting point for the other professionals and guidance you need, like tax, real estate and estate planning. Here are three key financial decisions which I believe should start the process. How you answer these can have a big influence on everything else.
How much will my standard of living change? – There is all kinds of folklore about how standard of living changes in retirement. Much of it is based on old ideas about a paid off house and a hefty pension. The truth is, with historically low interest rates these last several years and the slow death of the pension as a retirement strategy, many people entire retirement with new costs add to the old ones. Additional health care expenses, a desire for more travel and exploration with kids and grandkids, upgrades to the house you’ve always wanted to do. These often diminish substantially when retirees get into their late 70s and 80s, but for the first two decades of retirement, many see spending go up, not down.
How you standard of living changes in retirement has a huge impact on what your sources of income should be, how you should manage your tax strategy both now and in the future and what to expect from your estate plan. Before you can accurately delve into these other areas, this first one must be clarified with real data and real commitment to a plan.
What are my late career and retirement priorities? – This is related to the first, but more values-based and less data-driven. Too much of the information floating around about retirement planning assumes everyone does it the same. This couldn’t be more false. Retirement (to the extent that word is even accurate anymore) is done so differently by different people that to say “all retirees should…” is a recipe for trouble. Some want to retain an income stream through consulting or even a new career, some want to have a family-based retirement where they move to be close to grandkids, some want to travel, and some are terrified by the whole thing!
The point is that it is so incredibly personal. Part of any good financial planning relationship begins with helping you put words to and prioritization to your goals. No one has the net worth to have it all, and your priorities should drive where you splurge and where you scrimp. This may feed into how you want to think about generosity, giving to your family (all estate planning questions) or how you strategize your plan to pay taxes now or pay taxes later.
Who is dependent on my retirement plan? – This one has gotten a lot tougher than it used to be. Today, many retirees find that they are still supporting their children in various financial ways, others carry a heavy burden of aging parents who need medical, nursing or other significant support. While modern medicine is making us live longer, it is also making our lives more expensive. And potentially good things like Gap Years and advanced degree programs are putting financial strain on young adults (and often their parents) well into their 30s and sometimes 40s. Every family needs to decide what the financial commitment to each generation is. If you want to make sturdy financial, tax and estate plans, it starts with getting clear on who your dependents are, how much you are going to support them, and—as best as you can tell—for how long.
Financial decision making is a process. And what decisions you make first can have a huge impact on the ones you make later. When you have that 5am moment of thinking, “I should really get on top of this!” Start with the right questions with the right professional partners to build the financial decision-making team to help you toward your highest goals and aspirations.
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