Independent Thinking^®

Financial Planning: More Than Investing

There are two types of financial plans: the ones that sit in the back of a drawer (or the email box equivalent), and the ones that are regularly revisited and refreshed. We are proponents of the latter. Proper financial planning begins and continues with conversation, at least every year and often more frequently, as family, business, regulatory and market conditions evolve. Current financial circumstances, attitudes to risk, and long-term goals are likely to be the major topics. But as much of the advisor’s work is in getting the details right, there’s a lot more to discuss too.
 
What are the best steps to take now to secure your lifestyle and protect you as you age? How will a new venture, gift or donation impact your liquidity needs? What are the tax implications for your estate?
 
It’s a lot to consider. Done right, regular financial modeling will enable you to understand the long-term implications of spending patterns on your portfolio, taking into account capital market assumptions embedded within various asset allocation decisions. You could review Monte-Carlo simulations, which predict the probability of a variety of outcomes across a range of variables, but you may be better served by a thorough drawdown analysis that illustrates what may happen to your portfolio in a variety of market conditions, such as a repeat of the 2008-2009 financial recession, the brief 2020 COVID meltdown, or the 2022 inflation-related drawdown.
 
If the results are too much to stomach, you’ll want to consider a less risky portfolio, and the consequences to income and growth that will likely flow from that decision. Either way, you’ll probably want to maintain the equivalent of three to five years in cash and defensive assets. You may establish a specific reserve fund or strategy if there’s a known risk on the horizon. For example, if your plan is dependent on continued employment income from you and/or your spouse, have you assessed the need for disability and/or life insurance to protect that income stream?
 
Once the asset allocation is agreed upon, the next (but not last) step is implementation. Whether putting cash to work to build out agreed asset allocations, transitioning an existing portfolio, or managing around a concentrated holding, the investment process should be methodical and transparent.
 
A financial plan is only as good as the inputs used and the assumptions made – and life, as we all know, can be unpredictable. As such, it is essential to revisit the plan regularly, ensuring that you are on track to meet your goals, and accounting for evolving family and market conditions, always mindful of potential tax consequences. Recent losses in the markets and spikes in inflation make this a particularly important time to revisit your plans. And of course, every major life change – marriage, birth of a child, retirement – is a reason to check back in with your advisors and adjust the plan appropriately.
 
A comprehensive and thoughtfully managed financial plan shouldn’t collect literal or virtual dust. It should evolve, providing inspiration and peace of mind.
 
Tom Olchon is a Managing Director and Wealth & Fiduciary Advisor at Evercore Wealth Management and Evercore Trust Company. He can be contacted at [email protected].