Avoid These 4 Financial Planning Pitfalls To Step It Up

 

Financial success is all about intention and, you guessed it, planning. All too often, people simply do not give enough consideration to not only create an initial vision and plan but ensuring to revise that vision and strategy as their lives evolve. When it comes to your plans for the financial future, what -is- the worst that could happen? Well, here are just a few examples…

Situation 1: The MIA College Fund

Problem: No assets on hand that you could easily convert to cash 

 

A mother, who is a busy professional, focuses all of her energy and resources on her practice. She reinvests all of her revenues during a growth phase, assuming that when it’s time to pay her son’s tuition, her excess income will be enough to fund it from cash flow. Unfortunately, high school graduation and a recession arrive at the same time. Though she has built a successful business, there isn’t enough income coming in to immediately fund both her lifestyle and her son’s college expenses.

 

Solution: A good financial planner could work with this mom to make sure that her planning involves setting some of her excess earnings aside each year. At a minimum, these funds would be available if current cash flow wasn’t sufficient to contribute toward her son’s tuition.

 

Situation 2: The Disappearing Coverage 

Problem: Getting (and losing) all of your insurance coverage through your employer

 

A successful executive at a well known, large company buys the maximum amount of life insurance available through his employer. Over the years, he has paid in thousands in premiums to make sure that his family is covered. At age 60, he’s an unexpected victim of corporate restructuring and takes early retirement only to find out that he has emphysema. Despite a good prognosis, he can’t get insurance on his own.

 

Solution: Working with a financial planner would help the man see that rather than maintaining all of his insurance through his employer, an individual policy may have been appropriate and could be maintained regardless of his employment status.

 

Situation 3: The Unexpected Parting Gift

Problem: Forgetting to update your beneficiary designations

 

Not long after he starts his practice, a young physician takes out a sizeable insurance policy to replace his income for his wife, should something happen to him. The policy is set up to draft from his savings account. After several years, he and his wife get divorced, and the physician later remarries. One night while driving home from the hospital, he’s in a fatal accident, leaving a $1,000,000 death benefit from his old insurance policy to his first wife. One of his brides spoke highly of him at his funeral, and you can probably guess which one that was.

 

Solution:  An ongoing relationship with an advisor, including regular reviews, should provide routine opportunities to check and update beneficiary designations.

 

Situation 4: Easy Come, Easy Go

Problem: Investing too aggressively

 

An equity investor hears about a “can’t miss opportunity” from a relative at a recent tailgate. Upon returning to work on Monday, he uses his company’s discretionary retirement plan to invest half of his nest egg in this “sure winner” to capitalize on its upcoming earnings announcement. Unfortunately, the announcement included news that the company’s blockbuster drug was not approved by the FDA.

 

Solution: It’s best to make decisions and set a course during a time that we are not overly emotional. By having a plan in place that guides his investment decisions, this investor would be less likely to chase every hot tip he receives.

 

None of these situations are pleasant; I realize that. They do, however, represent easily avoidable situations. Often we view planning through rose-colored glasses. We think about all of the wonderful things that we have to look forward to. Our mind’s eye focuses on the things that we have to do to achieve the goals that we have set out. It’s natural, and it’s an important part of the process, but it isn’t the only part.

 

“Chance favors the prepared mind” – Louis Pasteur.

 

Someone once said, “I’d rather be lucky than good.” He wasn’t in the planning business. I prefer the above rationale of Louis Pasteur. Most of the situations that life presents us with aren’t complicated when viewed through the proper lens. I often tell prospective clients, “This may be your first time going through this situation, but it’s not ours.” Preparing for life’s surprises is part of the process. It’s an outside-of-the-box way of looking at problem-solving, but that type of financial planning preparation can be the difference between getting it right and getting what’s left.

 

 

 

 

***Any opinions are those of Chip Munn and not necessarily those of Raymond James and investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.

The examples throughout the material are hypothetical and for illustration purposes only and do not represent an actual investment.