Multitude of factors weigh on financial planning

Mark Ellman, CLU, ChFC, CFP, is a senior financial planner with MetLife Securities Inc. and a senior account executive with Metropolitan Life Insurance Company.

What's important about money is likely different to each person who ponders it, because people all have their own goals and wish to enjoy different types of lifestyles.

Some may think of it as investment planning, retirement planning or estate planning.

But financial planning is not just any one of these. It is a process focusing on all the financial, external and emotional factors that may have an impact on one's goals.

Generally speaking, there are five steps in the process.

Step 1 should be a no-obligation initial meeting for the purpose of discovering whether you, the client, and the planner will have a good fit in working together. The planner should focus on the importance of money from your perspective, gain an overview of your current financial picture, and a basic understanding of your goals and objectives. You need to determine if this is a person you can trust and have confidence in.

Step 2 is a confidential, thorough gathering of all financial data; your assets and liabilities, income and expenditures, and a detailed picture of the financial goals and desires you wish to achieve, along with an understanding of your investment time horizon and risk tolerance.

In Step 3, a preliminary analysis is prepared to clarify the details and discuss the strategies that will facilitate the achievement of the goals. There can be several approaches to achieving a goal, and it's important to identify the ones that are most suitable for your situation.

Step 4 is the final plan presentation with specific written recommendations for your unique situation that outline the strategies discussed. The written plan becomes the blueprint for success, but action has to be taken in order to achieve results. It's no different than buying a book on fitness. To get in shape, you have to do the exercise.

Step 5 involves monitoring the plan. The one constant in life is change, so the plan should be updated annually or as needed.

A financial plan should be comprehensive in scope, meaning it should address your cash management, net worth, investments, retirement, education, insurance, tax, estate and business (if in private practice), much like having a thorough physical exam.

One common misconception is to equate financial planning with a single discipline such as investment management. While investment planning is obviously a critical component, an investment management-only approach is incomplete financial planning. Each of these areas should be developed to the detail that is appropriate for each individual.

How much is enough for retirement?

Is there a risk of outliving your money?

What resources will be necessary to send the kids or grandkids to college?

How much life insurance is needed and what type?

What's the right balance of risk and return on your investments?

The answer to any of these questions can directly or indirectly affect all of the other areas. A well-written financial plan should integrate all of your unique concerns in a cohesive manner and create a good balance of strategies to achieve your goals, while still enjoying the things that are important to you today.

The many details of a financial plan can be complex, but the beauty of the analysis and written recommendations is the organization and simplification of your financial life so you can concentrate on the things that are important in all the other areas of your life.

Sometimes an analysis becomes a feasibility study to determine if the goal is achievable in the desired time frame and with current abilities. For any number of reasons, a goal may be unachievable or need to be fine tuned if it is unrealistic. And things are constantly changing. The market returns of the late 1990s gave many investors a false sense of security, while the last two or three years have caused many to change their goals and expectations. So whether you are on track or need to make adjustments, updating the plan is crucial to avoid surprises and respond to change.

Since no one works for free, find out how the planner is compensated as it can vary. Some may charge by the hour. In many cases a planner charges a flat fee for the service, and the fee is based on the complexity of your situation and the estimated time to complete the plan. Some charge a combination of fees and commissions. The value of working on a fee basis is that you are under no obligation to purchase any product that may be needed, such as insurance or investments. If the planner does offer the products you need, the decision to purchase them is yours, and those products must be suitable for your situation.

Remember that financial planning is more than just goals and objectives that require money to achieve. It can play a crucial role in the fulfillment of our values. Money by itself is not as important as the freedom it provides so we can have and do the things that are important to us with the people that are important to us.

When all is said and done, many of us want to have made a significant difference in the lives of our children, grandchildren and the community we live in. So if you have a financial plan, review it and stick to it. If you don't, get one.