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5 Myths of Financial Planning

Mark Zaifman   |    Wed, Nov 02, 2011 @ 10:36 AM

Financial planning myths

Over the years, I’ve heard the same concerns again and again by people who are dipping their toes into the financial planning waters for the first time. As when I started Spiritus Financial nine years ago, my aim continues to be on financial education and empowerment, not on selling. The more you learn about money – the more successful you’ll be financially. So here they are, the five most common myths I’ve encountered in my financial planning practice.

1) High allocations to bonds, CD’s and other fixed income investments will reduce risk

I suppose that depends on how one defines risk. I define it as running out of money before you run out of life. If a major allocation to fixed income will produce returns that virtually assure you of depleting your portfolio in this lifetime, how can one define that as a low-risk portfolio?

Adding the appropriate allocation to equities may create more fluctuation, but it could reduce the risk of running out of money. Before constructing an investment portfolio, one must not only measure 'risk tolerance,' but the return necessary to achieve their goals.

2) Wealthy people don’t need financial planning and middle-class people can’t afford it

It’s often said (and believed) that the people who need and could benefit the most from comprehensive financial planning - the middle class - cannot afford to pay advisors for planning. Those who can afford it, the 'wealthy,' don’t need it. I disagree on both counts.

There are many fee-only financial planners, like myself, who bill for services hourly and focus on working with middle-class clients. Whether it’s planning for retirement, education funding or designing a smart and tax savvy investment strategy, there are an abundance of options available.

To assume that wealthy people do not need financial planning is to not understand what planning is all about. Usually, the wealthier the individual, the more complicated his or her issues are. Assuring that clients’ estate plans, tax plans, investments, business plans, current and future cash flows and other issues are coordinated and reviewed periodically is extremely important to clients with wealth.

3) Everyone retires

I meet clients all the time who have no plans to retire. But so much of what is promoted as retirement planning is laced with fear and scarcity about running out of money or not having enough. The word retirement itself conjures up all sorts of feelings that often make it that much harder for a client to truly express how they feel about this life transition. And remember, just because you may no longer be working for money, doesn’t mean you’re no longer working and ‘retired’. We prefer asking each client, “How do you visualize your life in your 60’s, 70’s, 80’s and beyond?” If retirement is in a client’s plans, she will tell you and you can then plan accordingly.

4) Accumulating wealth is the major purpose of financial planning

While wealth accumulation may be a desirable goal for many of my clients, the primary job of a holistic, fee-only, financial planner is to help clients answer the question: “For what purpose?” I like to remind clients that money is a wonderful servant and a poor master.

While most people understand this intellectually, their actions are often in conflict. Also, the media does not help with its 'stock of the week' mentality. As a holistic financial planner, I take the time to truly understand my clients’ goals and wishes and help them develop and follow a plan that gets them to where they want to be. Accumulating a large estate to leave a legacy may be exactly what they want - but to assume that everyone wants to die rich is not holistic financial planning.

5) Financial planning is a one-time event

Because the media and the financial planning industry in general place so much emphasis on the development of a personal financial plan, it seems many people have come to believe that financial planning is all about the ‘plan’, a once in a lifetime event you handle and cross off your to-do list.

People not only need a  financial plan, but more importantly, they need financial planning and that implies an ongoing process with regular meetings and updates to assure that they are on target to achieve their goals, and that changes in their circumstances are factored in to their planning. It is a lifelong process.

Do you have any other financial planning ‘myths’ I can de-bunk for you?

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