By Meghan McGuire, CFP®, ChFC®, MS, RICP®
Having a plan is essential in achieving long-term financial security. It involves setting goals, managing income and expenses, and making informed decisions to ensure that current and future financial needs are met. Planning is the foundation to achieving lifelong goals and aspirations. Each plan is unique as no two people have the same set of goals, risk tolerance or investment objective. The goal of the plan is to meet each person where they are and then identify which financial tools are available to help them make better decisions. When a person and/or a family has a plan, they are more likely to achieve their goals which significantly reduces financial stress. It is shown that when a plan is implemented, it creates more confidence in the decisions made. A bonus: those that do plan tend to have higher net worth than those who do not.
Planning is more than just contemplating retirement. It encompasses so much more: caring for family, welcoming a new family member, saving for college, changing careers, future home purchases, travel, weddings, and major purchases just to name a few. These are all milestones that can lead up to and throughout retirement. With a clear plan you can break down long-term dreams into manageable objectives that help keep you accountable in achieving your set goals. Effective planning allows you to understand where your money is going and how to allocate it efficiently.
Life is unpredictable and unexpected expenses and emergencies can strain your finances. A well-thought-out plan, which includes an emergency fund, gives you a financial cushion during tough times. A comprehensive plan also includes insurance needs that can cover health, life, disability, and property insurance. Unexpected expenses can also lead to increased debt. Planning helps manage existing debt and prevents new debt from becoming overwhelming.
When it comes to making investment decisions, emotions tend to overcome rational thinking. Investors tend to sell in down markets to protect them from downside risk. Most of the time these investors do not get back in at the right time and they tend to miss recovery and growth. With a plan in place, it helps to eliminate those fearful knee jerk reactions by focusing on the long-term goal. Effective planning helps you build a roadmap that ensures your investments align with your financial goals, risk tolerance and timeline. For example, long term goals might call for stocks while short term goals might require safer, more liquid assets like bonds or savings. A plan encourages diversification across different asset classes (stocks, bonds, alternatives) to minimize risk. Most plans should include market variations in their projections which account for these volatile markets.
A good plan will incorporate both asset location and asset allocation. By understanding tax-advantaged accounts like tax deferred employee-sponsored plan (QRP) such as a 401(k), 403(b), or a governmental 457(b), or an individual retirement account (IRA). and tax free (Roth QRP and Roth IRA) you can help maximize to your investment returns while minimizing your tax burden. In the taxable accounts, planning can help you identify tax-efficient investments such as municipal bonds or tax-loss harvesting such as Direct Indexing. Through consistent contributions and time, planning helps you take advantage of compounding interest which can significantly enhance your growth potential over time.
With a plan in place, you are more likely to stick to a budget, avoid impulse purchases, save for those long-term goals, and make informed investment decisions. This disciple can lead to long-term financial stability and success.
Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are federally tax-free provided it has been more than five years since the Roth IRA was funded AND the owner is at least age 59 ½ or disabled, or using the first-time homebuyer exception, or taken by their beneficiaries due to their death. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRA’s may be subject to an IRS 10% additional tax if distributions are taken prior to age 59 ½.
Distributions from an employee-sponsored retirement plan (QRP) are subject to ordinary income tax and may be subject to an IRS 10% additional tax for early pre-59 ½ distributions.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Wells Fargo Advisors is not a legal or tax advisor.
Investment and Insurance Products are:
• Not Insured by the FDIC or Any Federal Government Agency
• Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
• Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Meghan McGuire, CFP®, ChFC®, MS, RICP®
First Vice President – Investment Officer
Virtuent Wealth Management Group
of Wells Fargo Advisors
