Why You Need a Financial Plan Part 3

Why you need a financial plan

financial planning

In this series so far we covered how a financial plan can help you optimize your Social Security benefits. Click here to read part 1 and part 2. With advances in technology, you can easily analyze and compare different strategies and the results that follow.

The purpose of a financial plan is to discover and establish your financial goals and then develop a plan to achieve those goals. A good financial plan takes a comprehensive approach, considering all aspects of your personal and financial positions. It encompasses the core financial planning topics:

  • General Financial Principles – Are you managing your cash flow and budget?
  • Risk and Insurance Planning – Do you have the right amount and right type of insurance?
  • Employee/Employer Benefits Planning – Are you taking advantage of your employee benefits?
  • Tax Planning – Are you paying unnecessary taxes?
  • Investment Planning – Are you invested in the right things in the right amount?
  • Retirement Planning – When and how much money do you need for retirement?
  • Estate Planning – Do you want to leave an inheritance?

Since your financial plan helps you meet your goals, it is important to set and verify your financial goals. Start with your needs, then wants, then wishes. If you have multiple goals, prioritize and rank them. Do the goals require one-time funding or ongoing? Do your goals involve acquiring an investment, asset, or service? 

Besides retirement, funding health care costs is one of the most important goals that many do not take into account. According to the Employee Benefits Research Institute (EBRI), Medicare covers about 62% of an individual’s current medical expenses. Unfortunately the percentage covered could go down with retirees’ health care costs rising.

According to a study by Fidelity, a 65-year-old couple retiring this year will need an average of $220,000 (today’s dollars) to cover their medical expenses throughout retirement. This amount doesn’t include nursing-home or long-term care and only applies to those with traditional Medicare. Currently, the average annual out-of-pocket expenses for someone on Medicare is approximately $5,000 for individuals and $10,000 for couples. If you expect to retire before age 65, you will have to purchase private insurance until you’re eligible for Medicare.

Health care expenses in retirement are primarily made up from your Medicare Part B and D, Medigap, and any out-of-pocket expenses. The premiums you pay for Medicare Part B (medical insurance) and Part D (prescription drug coverage) are dependent on your Modified Adjusted Gross Income (MAGI) which is the total of your adjusted gross income and tax-exempt interest income. Another study by the federal Agency for Healthcare Research and Quality found that an average hospital stay cost $9,200.

Given that health care costs are one of the largest expenses in retirement, a good financial plan can help you cover them without infringing on other goals. Your plan will be able to show the annual costs for your goals. Based on your current financial situation, it will tell you the probability of success of reaching these goals and what you need to do to reach them.

Part 4 of the series we cover the importance of risk assessment, investment preferences, and how it affects your financial plan!

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