Important Financial Planning Questions a Financial Advisor Can Answer for You
Money has been a complicated topic ever since its origin. Those who have enough of it struggle to spend it wisely, while others who do not have it, strive to earn it. This has been the case for a long time and is not likely to change anytime soon. Everyone needs help with their finances. This is where a financial advisor comes into the picture.
Also known as a financial planner, your financial advisor is a professional who can help you expertly organize your finances and other related aspects. Your advisor can do all your financial planning for you from creating a budget to choosing and forecasting investments and savings as well as providing you with a clear picture of your preparedness for retirement and other unexpected mishaps.
You can also manage your own money. However, seeking professional assistance allows you to place your monetary strategy a notch higher. A financial advisor is an expert in the field and has years of training, education, and experience in finance and related matters. Hence, a financial advisor is capable of making a significant difference in the quality of the financial choices you make.
Your financial advisor will work with you to better understand your monetary and personal position. They will use this data to frame comprehensive financial strategies for your present and future needs. Your advisor will understand your goals, risk tolerance, personal preferences, life stage, etc., and accordingly, prepare a long-term monetary plan before they make any recommendations.
Here are some of the most important questions that an advisor can answer for you:
- What do I need to do differently to achieve my monetary goals faster?
- How much do I need to save for retirement to maintain my current standard of living?
- How can I manage my debt and eventually become debt-free?
- What type of insurance will I need once I retire?
- How do I manage my investments for accumulation of wealth?
- What changes can improve my tax situation and minimize tax liability?
- How much do I keep as an emergency reserve to stay safe for an unexpected future?
- How can I create an efficient estate plan and minimize estate taxes?
The objective of hiring a financial advisor is to understand what you can do differently to improve your current monetary position. Your advisor will answer this question for you and help you get on the right track to achieve your goals faster and better. The first step they will take is to understand your current financial situation and monetary goals, and accordingly, devise sound strategies for your present and future. The advisor will create a zero-based budget where every dollar will have a defined purpose, eliminating any unnecessary expenditures. The objective is to save more and spend prudently while maintaining adequate liquidity. Your advisor will assess and adjust your asset allocation as per your needs, risk tolerance, and goals. Moreover, they will help you keep things in perspective, mitigate short-term losses, and provide a long-term investment view so that temporary market situations do not cloud your judgment.
Planning for retirement is one of the most critical aspects of financial planning. However, despite the rising awareness about the importance of financial planning, there are many who are still not on the right track mostly because of unawareness. People are not aware of how much they need to save for retirement. Your financial advisor can help answer this question for you. The professional can assess your current standard of living and estimate how much you would need to save for your golden years. As per experts, it is advisable to have at least 15-20 times of your present income to sustain you during the non-working years of life. In this regard, your advisor will help you understand how to achieve this target and give you detailed information regarding various retirement savings vehicles, their advantages and drawbacks, withdrawal limits, penalties, and more. Your advisor can help you create a fool proof retirement plan by creating a defined goal and setting a path to help you achieve the target. The advisor will map your risk tolerance as per each life stage, and then alter your retirement portfolio. The professional will guide you on the right savings options among different accounts, such as an IRA (Individual Retirement Account), a 401(k), a Roth IRA, etc. Further, your financial planner can help you understand how to leverage your retirement accounts to minimize your tax liability, maximize your contributions, plan penalty-free withdrawals, and make sure you do not outlive your savings. You can also seek your advisor’s help to maximize your Social Security cheque by delaying your withdrawals.
Debts often create a significant hurdle in your financial objectives. The more money you owe, the further you will be from achieving your monetary goals. Hence, it is best to constructively manage your debt and other financial liabilities. But debt management is complex, risky, and involves a lot of stakeholders. Your financial advisor can help you wisely manage your debt, reduce your liabilities, and increase your income level to eventually become debt-free. Once you are free from any financial liabilities, you will be in a better position to realize your monetary goals.
During retirement, your regular income sources shrink, while your out-of-pocket expenses, medical needs, etc., continue to rise. This puts a strain on your retirement savings and can cause extreme financial stress unless you invest in a sound insurance plan for your retirement years. Your advisor can help you understand the different types of insurance policies available and the ones that will fit your need. For example, if you are planning to travel around the world during retirement, your financial advisor can help you find a suitable travel insurance plan. In case you wish to have a regular source of income even during the non-working years of your life, your financial advisor can help invest wisely in the annuities that guarantee reliable income for you for life or a predetermined period. Alternatively, the professional can assist you in securing your health and long-term care goals. As per AARP, the out-of-pocket expenses for long-term care can go up to $140,000 on average. And in contrast, even if your long-term care insurance policy approximately costs you $2,700 per year, you and your family can still save a significant sum. Moreover, the professional will also create wise strategies on how to use government-sponsored health programs like Medicaid, etc., to maximize benefits.
One of the most financially critical decisions you need to make in your life is regarding your investments. Your investment portfolio is the foundation for your financial future. Hence, it is important that it aligns with your interests, objectives, and overall risk appetite. Your financial advisor can help you manage your investments wisely and create a sound plan keeping in mind your future growth and retirement years. They will help you form a portfolio aligned with your monetary goals and risk tolerance while at the same time maximize your profits and support the better accumulation of wealth in the long-term. For example, if you are young and have several years until retirement, your advisor will most likely create a portfolio that will include maximum investment in stocks and less in bonds and other conservative securities. However, if you are near your retirement age, the professional will aim to include more conservative (even though less rewarding) securities like bonds, cash deposits, etc., in your portfolio. Further, your advisor will also track the financial performance of your portfolio and suggest appropriate measures to enhance your investment returns. Besides, during extreme volatile market conditions like during the COVID-19 pandemic, your financial advisor can use their specialized acumen to help you maintain stability and stay afloat.
Taxes reduce your income and have an impact on your savings. But it is possible to deploy tax-efficient strategies to minimize your tax liability and ensure you only pay the least possible as taxes on your income. In this regard, your financial advisor can help you improve your tax position. They can suggest tax-aversion tactics like charitable donations, giving gifts, setting up trusts, using tax-loss harvesting, capital gain offsetting methods, and more. The professional can also help identify the most tax-efficient retirement savings accounts amongst options such as an IRA (Individual Retirement Account), a Roth IRA, a 401(k), a Roth 401(k), etc. These advisors have in-depth knowledge about how to take distributions from these accounts to save taxes. They can guide you regarding different penalties on distributions and how you can evade them. Moreover, if you have received an estate gift or an inheritance, your advisor can work with you to reduce its tax implications.
Your financial planning is holistic only when you have a plan that can help you stay safe even during the most financially tiring times. An efficient way to plan for the unexpected future is to have an emergency corpus. But how can you determine the amount to keep as an emergency reserve? Even though experts recommend setting aside at least six months of current living expenses as reserves for unforeseen times, it is not a standard rule. Your emergency corpus should be as per your financial situation, income, expected emergencies, medical health, life stage, and more. The more chances you have of facing an unexpected event in the future, the more emergency savings you would require. Your financial advisor can help you answer this question and determine the best way to save for tough times. Moreover, the professional will also assist you in keeping this money safe and setting guidelines for its usage. Once you achieve the set emergency goal, your advisor can help you raise the bar higher and plan for even bigger unforeseen circumstances like unemployment, disability, divorce, etc.
End-of-life matters like estate planning, creating a will, etc., are equally vital as retirement planning. With an effective estate plan, you can ensure that your financial assets are used and distributed as per your wishes. Moreover, efficient estate planning is a reliable asset for unfortunate events like disability, inability to handle financial matters, etc. But estate planning can often be complicated and involve several intricate phases that need to be well-understood. Your financial advisor can help you create a fool proof estate plan. The professional will take inventory of your assets, consider your family’s needs, help you frame and update your will, enable you to lay down the directives of the estate, and work progressively to minimize estate taxes.
To sum it up
A competent financial advisor can help you simplify all the above situations and more, allowing you to live your present well while also safeguarding your future finances. Hence, it can benefit to engage with a professional financial advisor and begin planning early in life to tap opportunities and accumulate a larger corpus in the long-term.