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Financial planning is an ongoing process, encompassing
a wide range of topics and the use of many tools.
The process helps you develop strategies to
enhance your financial security and leads to
the development and refinement of a financial
plan based on your goals, plans, and expectations.
Income tax planning is part
of a good financial plan. It involves looking
at the “big picture” – both
the short-term and long-term goals in your financial
plan – and using the tools available to
you to meet those goals.
A good tax plan, as part of
a good financial plan, recognizes change. Not
only is the overall financial and tax environment
changing constantly and rapidly, but your personal
environment also changes as you face various
life events (including marriage, the birth of
children, career changes, and so forth). Successful
tax and financial planning involves periodic
reviews of your plans, strategies, and techniques
to make sure that they keep up with changes.
In financial planning, a person is generally
considered to have three time periods:
- the Accumulation Years:
ages 24 to 45
- the Conservation Years:
ages 45 to 65
- the Retirement Years:
ages 65 and up
Income tax planning varies
during these three periods. Be aware that these
three periods may very well overlap, and the
age ranges we have indicated may be different
for any given individual. However, certain general
guidelines apply during each period and are
discussed below.
During the accumulation years,
you will need to lay the groundwork to meet
your financial goals throughout your life. You
should focus on four actions. First, you must
understand the sources of your income –
compensation, savings, employer-sponsored plans,
Social Security – and plan how to use
these sources to generate the funds you need.
Second, you should set out your expected expenses
throughout your life, including those related
to housing, children’s education, and
retirement. Third, you need to determine whether
your sources of income will cover your expected
expenses. Fourth, you must determine what insurance
coverage you need. These actions will help you
create and begin to carry out your initial financial
plan.
During the conversation years,
you are earning your peak compensation and have
a stronger sense of your financial needs. You
should again focus on four actions. First, you
should fine-tune your projected expenses for
the rest of your life to determine the resources
you need to accumulate. Second, you must focus
on investments – are your current investments
sufficient and appropriate? What investments
do you have to make to reach your goals? Third,
you should start to plan how you want to handle
your retirement funds. Fourth, you should develop
an estate plan. These actions help you (1) analyze
the effectiveness of your plan and make any
necessary revisions, and (2) put in place the
additional plans you need to handle your finances
in the balance of your life.
During your retirement years,
you will reap the benefits of your earlier retirement
planning. Your concerns focus more on such questions
as: What happens if I work part-time? What government
funds should I receive (Social Security, Medicare),
and how do I get them? What happens if I need
money from my retirement plans? What funds should
I draw from and what are the tax consequences?
Your most important actions during these years
are to stay alert about your financial status,
talk with financial advisers as needed, and
follow developments in the tax planning environment
that could affect your financial plan.
The
articles and opinions in this publication are
for general information only and are not intended
to provide specific advice or recommendations
for any individual.
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