While it is ideal to start your financial planning journey early, most people don’t consider hiring a financial planner until something significant moves them to do so. Some of the more common triggers are starting a family, receiving an inheritance and planning for retirement. Here’s a closer look at some of the big events that send people in search of professional financial advice.
1. Starting a Family, Buying a Home
Starting a family brings about many new financial decisions. Many times the first conclusion is the need to move into a larger home. I recently had a client who asked me to help him decide how much home he could afford given his other financial goals. A mortgage consultant will often tell you how much mortgage they will allow, but that can be different from how much home you can actually afford. We looked at how the mortgage payments and the tax benefits of home ownership interplayed with his retirement goals and were able to determine an optimal home price point given the current mortgage terms and his aversion to debt.
2. Planning for College
Another important financial concern is preparing for the cost of college. College is expensive and there are only a limited number of years to prepare for it. While the increase in college tuition has tapered off in recent years, it still outpaces the general inflation rate. A financial planner can not only help with planning for the future cost of college, but can help with financial aid, investment selection and minimizing taxes along the way. Some planners specialize in college planning and do not even offer other traditional financial planning assistance.
3. Dealing With Inheritance
An inheritance is often a motivating reason to turn to a financial planner. Since the majority of people will only receive one inheritance during their lifetime, it is something very unfamiliar to most. Several years ago, I met a prospective client whose mother had recently passed away. When I inquired about her IRA he told me that he had planned to keep the money tucked safely away in the IRA until he was required to withdraw it, which he thought was the familiar age of 70½. However, since inherited IRAs are governed by significantly different rules than traditional IRAs, we had to act quickly an take a withdrawal in order to avoid a 50% income tax penalty on the inherited IRA required minimum distribution.
Inheritances also can cause confusion over investment decisions. Many people only have to make major investment decisions in their 401(k) plan. They have a list of investments from which to choose and the research is already prepared by their employer. Suddenly, having to develop a portfolio with no constraints and thousands of investment choices can be daunting. A client was referred to me who had no knowledge of investments. He had never participated in a 401(k), didn’t have an IRA and had been living paycheck to paycheck for his entire adult life. His father had just passed away and left him a large sum of money. I spent our first several meetings together just explaining the differences between stocks, bonds and natural resources before we even started investigating specific investment choices and how they could help him reach his goals.
4. Getting Ready for Retirement
Retirement planning consistently emerges in polls as the most significant financial concern for Americans. Those reaching ages 45 to 50 naturally start thinking about how they will survive financially after they stop earning an income. As our life expectancies rise, the need for more retirement income has increased. In my practice, this is the most prevalent reason people turn to me for advice.
In years past, a corporation took care of its employees in terms of retirement. People worked for a company for their entire career and then retired with a lifetime pension and a gold watch. Today, the onus is almost entirely on the employee to prepare for a secure retirement. Gone is the pension plan that provided for a lifetime income. It is now more difficult to know how much money is necessary to retire safely and comfortably. Retirement planning is complicated. Integrating portfolio management, income taxes, an uncertain Social Security benefit and rising healthcare costs into one cohesive plan that has a high chance of success is a daunting task, even for the professional, much less for the layperson.
Financial planning is a complicated task that often warrants the advice of an expert. When faced with a significant change in your life that introduces new financial demands, don’t hesitate to seek out a credentialed financial planner to sort through the maze of questions. The sooner you find help, the better chance you will have of achieving your goals.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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