When people think about financial planning, many picture choosing the right investments. Investment management matters, but it is only one part of a complete plan. Comparing a financial plan versus a portfolio shows the difference. A portfolio has to support your spending, keep taxes in check, protect you from risks you cannot afford, turn into income in retirement and eventually pass to the people you choose. A plan that only looks at investments can leave serious gaps in all of those areas.
Start Your Financial Plan With Goals, Not the Portfolio
Good planning begins with what you want your money to do. That might be a comfortable retirement, a second home, travel, helping family or giving to causes you care about. Turning those wishes into a plan means modeling what comes in and what goes out, today and in the future, under different assumptions.
For retirement, the most basic question is how your spending will change. Will you have paid off the mortgage? Is there still a child to put through college? Will you move? Beyond everyday expenses, the plan should hold up under different rates of growth and inflation. Big plans such as travel or an expensive hobby also need a budget that keeps inflation in mind. Spending patterns change and surprises happen, so you have to revisit the plan rather than write it once.
Turning Savings Into Retirement Income
Saving is only half of retirement. Once your paycheck stops, the job becomes turning savings into reliable income without running out. That involves more than picking a withdrawal rate. The plan has to decide which accounts to draw from first, when to claim Social Security, how required minimum distributions will affect your taxes, and whether to take a pension as a lump sum or as monthly income.
It also has to manage timing risk. A sharp market drop in the first years of retirement can do lasting damage if you have to sell investments to cover expenses. Keeping enough in stable assets for near-term spending gives the rest of the portfolio time to recover.
Taxes Shape Every Decision
Most retirees rely on Social Security and pre-tax accounts such as IRAs and 401(k)s, and many also hold taxable brokerage accounts, Roth accounts and annuities. Having money in accounts with different tax treatment gives you flexibility. In a given year you can choose where to draw from to stay in a lower bracket, avoid higher Medicare premiums or make room for a Roth conversion. That flexibility can also leave heirs with more after tax. Our advisors prepare tax returns every year, and tax planning is part of every client’s plan at no additional charge. See our tax planning page.
Adjusting the Portfolio Mix Within Your Financial Plan
A common rule is to take more investment risk early in your career, when you have time to recover from downturns, and shift toward a more conservative mix as retirement approaches. That is a sound starting point, but it is not the whole answer. Asset classes do not always behave the way you expect. In some downturns bonds cushion falling stocks, and in others both fall together. Choose the mix for your situation, and review it as markets and your needs change. Read more in What Is Investment Management and Why Is It Important?
Protecting Against the Risks That Can Undo a Plan
A plan also has to account for events that investments cannot fix. Disability, an early death, a long-term care need or a lawsuit can each undo years of saving. Insurance, legal structures and asset ownership all play a role. We review these as part of every plan. See our risk management and insurance page.
Planning for Longevity and Legacy
None of us knows how long we will live, so a plan has to work if you live into your 90s and still leave your estate in order. That means updated beneficiaries, a will and the right documents, all coordinated with your investments and taxes. Our estate planning and distribution page explains how we help.
How We Bring the Financial Plan and Portfolio Together
At Toomey Investment Management, an independent registered investment adviser in Wallingford, Connecticut, we plan these pieces together so that a decision in one area does not undermine another. In short, a financial plan versus a portfolio alone is the difference between seeing the whole picture and seeing one piece. The same advisor stays with you and adjusts the plan when life changes. Learn about our financial planning process, or call 203-949-1710 to start.
This article is for general information only and is not individualized investment, tax or legal advice. All investing involves risk, including possible loss of principal.