Some people don’t struggle too much when dealing with taxes, investments, and retirement plans. However, with little to no experience, it makes more sense to rely on the expertise of a financial planner or financial advisor.
Here’s a good analogy. If you cut your hand, you’d either bandage it yourself or head to the hospital for stitches, depending on the severity of the injury. The same rule applies when handling finances.
Distinguishing the Two Choices
As a young adult, you probably wouldn’t need the help of a financial planner. That’s because you only have a 401(k) or Roth IRA, as well as simple taxes to complete. Therefore, you should have no problem doing everything without assistance.
If you are a do-it-yourself type and enjoy being empowered with the ability to change your assumptions and run planning scenarios on your own, there is really good retirement planning software available today. One of the better choices is the WealthTrace Retirement Planner. Although they charge an annual subscription fee, it is much less expensive than a financial plan from a financial planner and it has all of the accuracy and detailed information that professional planning software has.
You might not even need help if you plan to purchase investments. However, that’s only if you can dedicate the time required to learn about important concepts such as diversification, market fluctuations, fund fees, and many others. Otherwise, it might be best to have a financial planner guide you along the way.
Sure, some people have no problem with their taxes, investments, and retirement. But there’s a caveat to that. If someone has substantial income or savings, there’s a risk of taking shortcuts. Especially as your goals shift, you’re going to face a lot of questions and uncertainties, which usually starts about 10 years before retiring.
To determine if you need a financial planner’s help, consider these things.
Tax Planning
Tax planning is twofold. First, you want to minimize your income taxes annually, and second, look at long-term strategies. If you’re doing everything yourself, you could easily miss opportunities that a financial advisor would catch.
For instance, say a couple in their 60s anticipates living on their pension, and they don’t plan to file for Social Security benefits until 70 to help maximize that benefit. That sounds pretty good considering that would keep them in the 15-percent tax bracket.
But from a financial advisor’s perspective, their decision raises concerns about the taxes they’d have to pay after the age of 70.5 when receiving payments from Social Security. The other issue has to do with this couple taking out the minimum required IRA distributions.
Without professional help, this couple could miss something important. The expert would advise them to do a Roth conversion, which would put them in the 25-percent tax bracket between the ages of 60 and 70. That way, they’d avoid getting lumped into a higher tax bracket after the age of 70.5. Not only would they save thousands of dollars every year for life, but they’d also enjoy a tax-free retirement.
If you’re maxing out various tax-advantaged savings, have significant taxable investment accounts, own a thriving business, keep most of your life savings in a tax-deferred account for retirement, and so on, you might want to speak to a financial planner.
Income Planning
Upon retirement, when regular paychecks no longer flow, you have to create income. A financial planner helps retirees so they don’t experience poorly timed investment losses. An expert would also do the following:
- Offer guaranteed options for income
- Provide guidance on choosing the best IRA and 401(k) distribution choices
- Offer advice on Social Security options
- Help solidify an income strategy so that a retiree has adequate income
Estate Planning
A financial advisor will carefully go over all applicable documents to ensure you have a viable plan in place for your estate and beneficiaries. If you’re interested in leaving something to one or more charities, a professional can also help with that.
Let’s go over an example. If you invested the majority of your life savings into your employer’s stock, you might live comfortably thanks to the dividends. Yet, you’d likely have concerns about the company struggling or failing. Still, you don’t want to sell your stock.
Now, let’s say you have no children, and therefore, you plan to leave the bulk of your money to charities. More than likely, a financial advisor would suggest you move your money into a highly appreciated stock for a charitable trust.
With that, you could diversify but without facing tax penalties. This would also allow you to take a charitable deduction that you would otherwise not get. Ultimately, you’d save money on taxes and dramatically reduce any risk pertaining to your retirement income.
Health Care Planning
There’s no way to predict what you’ll need as far as health care in the future or what Medicare will cover. Working with a financial planner, you’ll learn about various options and get information on the ones that best match your specific needs. An expert might even uncover additional coverage.
Investment Planning
The biggest issue with people handling their investment planning alone is that they don’t fully understand all the risks involved. They also underestimate the amount of time and effort it takes to maintain a healthy portfolio.
In addition, a lot of people doing it themselves make the same mistake. Instead of focusing on the long-term goal, they spend too much time on the tools utilized to achieve it.
Whether you want to avoid putting a financial burden on your loved ones after dying or you want to achieve financial independence while still alive, a well-versed financial planner or advisor will help you solidify both goals and actions.