Monday, November 16, 2015

Why long-term financial planning is out of control

We’re in a day and age where long-term financial planning is more important than ever in order to achieve your financial goals. My experience tells me that financial independence is rarely just a matter of luck.

I’ve observed that, in most instances, it’s a result of a lifetime of disciplined investing and simply living within your means. Among the major hurdles that make long-term planning so difficult are the circumstances over which we have no control. We can only react to them.

A few years ago, I had a retired client who decided to re-enter the workforce. He wanted to discuss all of his new retirement plan options and how they could fit into his existing investments.

He mentioned that he wouldn’t be eligible for any of his new company’s benefits until he was employed for six months. Rather than discussing his options immediately, I suggested we wait until it was closer to his six-month anniversary.

When we ultimately sat down, the entire investment platform offered by his new employer had changed completely from when he was hired six months prior. This is not an uncommon occurrence.
It’s also quite difficult to make long-term plans regarding income taxes. Last year was a good example. There was a new income tax rate for higher wage earners and numerous new taxes instituted in order to help fund the Affordable Care Act.

Another hot topic for many of my clients is Social Security planning. It seems to me that I get a solicitation in the mail almost weekly to attend a lunch or dinner seminar that explains the various strategies available for collecting benefits.

More than likely, such seminars are educational and informative, but as is so often the case in our nation, Uncle Sam just changed the rules. In the recent budget agreement, it was decided that the very popular Social Security strategy of file and suspend would soon be eliminated. So if you were a few years away from retirement, you’d be wasting time to learn about something that’s not going to be available.

You also have no control over the benefit package your employer provides. Other than by voting, you can’t control the tax codes and we certainly have no control or input over government-sponsored programs such as Social Security.

The point is that the items over which you have no input or control make long-term financial planning very difficult. During the planning process, I generally like to look deep into the future with a very cautious and conservative eye. Using Social Security as an example, I never like to project the maximum income a couple might possibly receive. I think it’s far more prudent to project less than anticipated, especially since the new Social Security statements say that Congress can make changes at any time and that there will eventually only be enough to pay 77 percent of projected benefits.

You can only control so much in life. I applaud those that take the time to learn in detail what they should do in the future. Unfortunately, the details that you can’t control keep changing.

That’s why long-term planning in today’s world requires frequent review. As you plan for the long term, make sure you keep an eye out for short-term glitches along the way.

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