In this episode: With the divorce behind you, it’s time to build a financial plan of your own. Jon Peyton walks through the five core areas of a plan, how to work out the return you’ll need, and how to decide whether to do it yourself or delegate it.
Key insights
- A financial plan covers five areas, in order: cash management, protection (insurance), long-term savings and investing, taxes and estate planning.
- Work out the return your portfolio needs to reach your goals, based on what you have, what you’ll save and other income such as Social Security.
- The 4% rule of thumb can give a rough sense of how much you’ll need, but it isn’t a guarantee.
- Where you hold each investment can affect your taxes, and higher earners face additional taxes to plan around.
- Not all financial plans are equal. Some focus mainly on retirement; others cover the whole picture.
- Think ahead about how your finances would work with a future partner.
Episode timeline
- 0:00 Introduction
- 0:39 The dust has settled. Now what?
- 1:10 Do it yourself or delegate
- 2:30 The five core areas of a plan
- 2:51 Protection planning and insurance
- 3:48 Long-term savings and investing
- 4:40 Example: the return you need
- 5:25 Factoring in Social Security
- 6:45 The 4% rule of thumb
- 8:25 Tax strategy
- 10:20 Taxes for higher earners
- 12:05 Estate planning
- 14:05 Not all financial plans are equal
- 16:50 Planning for a future partner
The episode in brief
The dust has settled. The decree is signed, the QDRO has divided the retirement accounts and the rest of the assets are separated. Now the question is how to use what you have to move forward. It starts with comparing where you are with where you want to be, in a financial plan of your own.
You can do it yourself. Books, online courses and calculators can get you there if you have the time. Many people don’t. After work and family, the last thing they want to do is figure out how much to save or whether their debt and investments are structured well.
Cash management and protection. The first area is cash management: your cash flow, your cash position and how much you need in an emergency fund. Next comes protection planning: health insurance and accounts such as an HSA or FSA, then disability and life insurance. Without a spouse to fall back on, you need to know your income is protected if you’re disabled, and that debts would be covered and wealth passed on if you died early.
Long-term savings. Then comes investing: which accounts and vehicles to use, and what return your portfolio needs to get you back on track. Jon’s hypothetical: you have $500,000 and are ten years from retiring at 70. You’d like $6,000 a month after tax, which might take about $7,000 a month before tax. If Social Security pays $3,000 a month, your portfolio needs to supply about $4,000 a month, or $48,000 a year. Using the 4% rule of thumb for withdrawals, that points to about $1.2 million. Your savings and investment returns over the next ten years need to close the gap. Withdraw more than the portfolio can sustain and you risk running out. These are generalities, not guarantees, so work through them with a planner.
Taxes. Tax-loss harvesting uses losses to offset gains. Where you hold investments matters too: interest from a taxable bond is taxed as ordinary income, so it may belong in a tax-deferred account such as an IRA rather than a brokerage account. Decide how much to save in retirement plans versus taxable accounts and, if you own a business, which tax strategies are open to you. Higher earners may face a 20% long-term capital gains rate, the 3.8% net investment income tax and the additional Medicare tax, and gains on investments held a year or less are taxed as ordinary income. The thresholds depend on filing status, so as a single filer you may reach them sooner.
Estate planning. Revisit it every three to five years. Children grow up, and charities you’ve named may no longer reflect your wishes.
Not all plans are equal. Jon notes that many firms build plans focused mainly on retirement, and some include them free with investment management, which can limit the time spent on them. A plan you pay for separately may cover more ground: cash management, insurance, investments, taxes and estate planning together. Ask any planner what their plan covers and how much time goes into it.
Plan for the life ahead. Your old plans assumed a spouse. Now think about the future you want, including how your finances might work with a new partner someday: whether you’d share control, and how you’d protect each other.
One area at a time. You don’t have to tackle everything at once. Work through the areas in order (cash, protection, investing, taxes, estate) and revisit the plan each year. Jon also lays out the full process in his book, The Master Plan.
Key action items
- Start with cash management: know your monthly cash flow and set your emergency fund.
- Review your health, disability and life insurance now that you’re on your own.
- Estimate the return you need using your savings, timeline and expected income such as Social Security.
- Ask a tax professional where each type of investment should be held.
- Decide whether to do it yourself or delegate, and ask any planner what their plan covers.
Listen next: Episode 18: Investing for Your Future Requires Re-Assessing This…
Value Creation Consultancy™ has since merged into Founder’s Accounting™.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.