5 IMPORTANT Things Financial Planners Miss (and Could Cost You Thousands)

Let’s talk about 5 things that financial planners miss when working with their clients. From not planning for Social Security, to not making sure their client has the right insurance, these are important financial plans that your financial planner should be helping you with.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

TRANSCRIPT:

John: I know people who have unfortunately been in life-altering accidents and had million dollar claims that they've received. Most people in our world say, “Oh yeah, I do insurance. I do life insurance and disability insurance.” Those are important and you need to have those, but what about these other things you're talking about? Those are equally critical in my mind.

Bridget: Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer, I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we jump into holes in many financial plans, I just want to remind everybody to hit that subscribe button. Help other people find this information on YouTube. And with that, let's talk about things that oftentimes get missed when we're talking about financial planning.

Bridget: Right, so I've got five things. We are comprehensive planners, and this is the first thing, tax planning. We do a lot on tax planning in this show, but tax planning and figuring out when to take deductions, when to take things like IRAs, where to take money from when you are retired can save you a bundle in taxes.

John: Yeah. And so, here's one of the things I think about. Number one, I love it. If you're doing it yourself, you need to think about taxes. But take a look at all the advertisements that you see out there for investment advisors and people just in our world. And everybody talks about tax wise investing. Isn't that the same thing as what you do?

Bridget: No, it's not. Here's how you can tell. We have a meeting every year with people that’s dedicated to tax planning, so we will be talking to clients about what's new in taxes. This year there's a lot. And then we do a tax projection to see, okay, how much do we think they're going to pay or owe, or get back. Is there anything we should do about that? Is there anything we can save? And then we do projections to say, okay, if they did this, if they nuanced this, if they didn't nuance that, what's the best way to do things this year? I can go on and on.

Before people retire, especially say you retire at 62 and you don't have to take required minimum distributions until 75 or 73 and you don't have to take your Social Security. Say you're going to take it to 67 or 70. Okay, so then you have some years where you think, “Oh, I'll pay zero in tax.” Oh, that sounds good, but then you're going to be in the 22%, 24% tax brackets later, which is not so good. And so, we try to do what's called tax smoothing, which is take some money out of your IRS early and take less out later, so that you maximize the opportunity when you're in the low tax brackets. That's a good example, I would say, of tax planning.

John: I think one of the things when working with an advisor is check out the fine print on the bottom of all those sorts of disclosures. And it says, “Check with your tax advisor. We don't give tax advice.” And all those things you described is exactly right; that's where the planning comes in. And I'll just make a comment that sometimes I'll hear people say, “Well, yeah, I got a CPA. I'm taking care of there.” And I say, “Really, what does that person do for you?” “Well, he tells me how much to make an estimate of payments each year.” That's not planning.

That's not those things that you just described, like figuring out what your tax burden might be and trying to minimize it over the course of your lifetime and making those specific decisions about how much money to put in or to take out of IRAs and those sorts of things. That's where the real bang for the buck is. And in my experience, most of the people in the tax world are really focused on reporting what happened and not as much on the planning side. And the people in the investment world just aren't in the position to actually do that stuff in general.

Bridget: Right. I absolutely agree. Okay, number two, real estate planning, real estate analysis. Most investment advisors would really rather you not be in any real estate. Maybe, they feel so-so about even your house. Why is that? Because they want to have all your money in the stock market and not in real estate. Now, in my opinion, comprehensive advisors really look at real estate too and have that as a part of the whole portfolio, because people like real estate. There's plenty of people who like real estate.

They have questions like, how much house should I buy? Should I buy a vacation home? Should I have rental property? How much should I be charging on my rental property? Am I making money with my rental property? What are my goals with rental property? Is it a good time to sell my rental property? When should I sell my rental property? All those kinds of questions are in my opinion part of great comprehensive planning, but I would say for most advisors that falls right through the cracks.

John: Yeah, here’s an example. A friend of mine inherited some property in the Midwest and on the west coast, both worth let's say a million dollars. And they're trying to figure out like, okay, do we rent this? Do we keep it? I said, “Well, geez, why don't you talk to your financial guy?” And he said, “He doesn't really deal with that.” “I thought you said that was your financial.” “Well, he just handles the IRAs and stuff.” That's a place where a real hole can be.

Bridget: And I just had some people who have had rental property for quite a while and retired, so you don't want to have when to sell rental property 100% dependent on retirement because the market can go up or down so much that it doesn't matter. But it worked out great. Okay, this is a good time to sell because your tax rate and because of other things are going to be really low. Why don't you pull the trigger now. Okay, number three, Social Security planning. There's a lot to be said about Social Security and a lot of people don't dig in that much. What are your thoughts?

John: Yeah, I agree with that. And for me the big thing is it's a one-time, irreversible decision, basically. That's significant. If you think about how much money the typical person will bring in over their lifetime in Social Security benefits. That's one of the biggest assets most people have. And not having a detailed look at that is problematic. We just talked with somebody, and they said, “Well, I'm gonna start taking them. I turned 62.” I said, “That's great. Does it make sense? Have you done an analysis?” “Well, not really.” Listen, why don't we dig into that and find out what the tradeoffs are, know about the pros and cons.

Oftentimes there's not one answer. It’s not like, “Oh, here's the thing to do.” It’s more like, “Here’re the tradeoffs, and here's what you give up if you wait until you're 70.” In our world, I hear a lot of people say, “You maximize your benefit if you defer till 70,” which factually is true. But there're tradeoffs that come with that. People rarely talk about those tradeoffs. And again, making an intentional decision is sort of the deal, not necessarily having the most dollars at the end of the day. But you know, thinking through those things is critical.

Bridget: Yeah, exactly. And your mental health is a factor when it comes to Social Security because sometimes people might have enough money, but they won't spend it until they have that Social Security stream coming in. And so, then they could be optimizing their life even more if they had that stream of money coming in. Sure, they'll get less money over their lifetime, but in a lot of cases that isn't the biggest factor, because you got to think about the behavioral finance elements of it and how are you going to feel.

And that's one of the big holes that I think a lot of traditional investment advisors and some financial planners miss. Number four, insurance. We review people's insurance when they start and then every three to five years. And we don't sell insurance. So this is unusual for people to get any kind of review on this because we're not selling, we’re looking at their best self-interest. And you really want insurance for the things that are really expensive and not likely.

I mean that's kind of the sweet spots for insurance. And so, when we're doing our review, sure, we'll look at your home insurance and your auto insurance, but something like your umbrella insurance, like your liability insurance, can really fit in that the category of if you had a claim, it could be really expensive and it's really unusual for it to happen. And that's kind of one of the holes that a lot of people have. You have a story about that.

John: Yeah, actually I was thinking about when I first moved into our office. We built an office condo and another financial advisor in town that I sort of knew or knew of anyway, he's not too far away, so he came to our open house. And when he came in, I said, “Well, geez, it's nice to see you.” We're talking a little bit, and I said, “Well, tell me about your business. What do you do?” And he goes, “Oh I do the same thing you do. I handle people's investments and stuff. And I even look at their insurance.” And I'm thinking to myself, “Oh, you even look at their insurance.”

As you just talked about, isn't that one of the critical items in financial planning? Before we hit record here this morning, I was just mentioning an article in our local paper about a landlord who unfortunately had a shooting on the property he owned. And the landlord was being sued by the family of the person who was shot. You’re not doing these things. What role do you have? But because you own the building, you're at risk and here's potentially a multi-million-dollar liability that's hanging out there for something you didn't have anything to do with. And those are the things you think, “Oh that's kind of crazy.” But that's the stuff you have to protect against.

And I know people who have unfortunately been in life-altering accidents and had million dollar claims that they've received and those who have been on the other side of things. You make a mistake, there's an accident, and now you have this gigantic devastation on either side of things. And again, that's the stuff where most people in our world say, “Oh yeah, I do insurance. I do in life insurance and disability insurance.” Those are important and you need to have those, but what about these other things you're talking about, which are equally critical in my mind.

Bridget: Right? Yeah. And so, the things that we look at the most for people with younger kids are life insurance and then the umbrella insurance, liability insurance again for the unlikely but high cost items. And then the rest of it we look at too. And then the last thing is beneficiary planning. So we look at people's estates and make sure that they're coordinated with plan that we are executing with them. But there can be low hanging fruit like who is named in your beneficiaries on these accounts? And again, that’s huge. When we have a client die, we just feel good if we have had the titling decent on these accounts.

Bridget: But we need to prompt people by waying, “Is this really what you want?”

John: Those beneficiary designations supersede, so they come before the will-based things when it comes to distributions. And just having those things match up is so critical and you've seen mistakes and so have I. We had a client who was in a years long battle with family because the beneficiaries on an IRA account didn't match what the will said for mom or dad.

Bridget: Exactly. So those are our five holes that investment advisors for sure and a lot of financial planners often miss. But we as part of Alliance of Comprehensive Finance, that's part of our regular program to make sure we double check all that stuff for people. And we have found that it pays off over the long run. Those can be bigger payoffs than the investing advice that we give.

John: That's right. That's a great place to wrap things up. Again, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: I’m Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. As I mentioned, we’re both members of the Alliance of Comprehensive Planners. John and I are both taking clients, but if you are looking for an advisor in your area and you like how we talk about things, you could check out acplanners.org.

John: And don't forget to hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.