5 Critical Questions A Financial Plan Can Answer

Financial Plan word speech bubble illustration on white background.

Every time I mention financial planning I see people’s eyes glaze over. They shift and wiggle as if a mental institution straight jacket has been suited up. Most of the time they are thinking budget. I can assure you that a financial plan does much more than create a wallet-crunching budget that prohibits lattes and eating out!

At its core a financial plan is an analytic tool. In my practice, I use it to answer questions and identify gaps that may do damage to my clients financially.

So if you’ve been asking yourself, “Am I on track?”, then creating a well-designed financial plan can answer that. This is just one question of many that a financial plan can answer.

Here are some questions a financial plan should answer. Consider these financial health vital signs.

1. Will I run out of money?
The probability of running out of money is a common concern for most people retired or approaching retirement. A financial plan can answer this complex question. It will also show you the trade offs. Would you be comfortable with a 25% probability of running out of moolah at age 80?

2. What’s my number?
I make fun of those commercials asking, “what’s my number”, all the time. However, you do need to know what sum of money you need to save in order to create the income required at retirement. You don’t retire on “the number”, you retire on the income “the number” produces. This may be the most important question a financial plan can answer.

3. What rate of return do I need to earn to meet my goals?
Knowing this number can give you great peace of mind, especially in a volatile or negative stock market environment. If you need to earn say 7% on your investments and you are in cash and CDs earning less than 2% then you certainly won’t be able to reach all your goals. By the same token, if you are earning say 9% or 10% and you only need 7%, then why take on the extra risk?

4. What’s my net worth?
To me, net worth is the most fundamental measurement of financial health. I mean, it has your assets, savings and your debts all listed. Based on net worth and your age, you can really tell if you are making progress building your wealth or spinning your wheels.

5. What is my optimum withdrawal rate?
Financial planners often counsel clients that the maximum withdrawal rate on a portfolio should be about 4%. So you get $20,000 of income from a $500,000 portfolio. Doesn’t sound like a lot? You better bump your savings then! If you withdraw at too high of a rate, your possibility of being a Walmart greeter increases significantly. The bottom line – you could run out of money too soon.

A good financial plan will answer these core questions, but can also help you determine whether you need additional life insurance, more education savings or a better estate plan. Everyone should have a financial plan. It doesn’t have to be a boring book of numbers. Think of it this way, it’s your blueprint to the financial life you’ve dreamed of.

If you want some help with your plan, write me at david@lexwealth.com, or just call me to get started, at (859) 225-2596.