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A Basic Financial Planning Checklist

A realization that has only very slowly occurred to me, over 15 years in the world of financial planning, is that the most common financial planning mistake that I see people make is not so much a particular bad decision, but rather completely ignoring certain parts of financial planning.

In many cases, that shows up in the form of focusing too much on the investing part of the picture, while having some other critical financial planning need that is going unaddressed.

And that’s not terribly surprising. Investing involves thinking about upside — how your assets will grow (and how they could grow, if you make a high-risk bet and get lucky). That can be fun.

In contrast, many critical financial planning tasks involve thinking about downside. (What if you become disabled or die earlier than anticipated?) That’s less fun.

In addition, a lot of critical financial planning tasks look suspiciously like work.

What follows is just a brief checklist of financial planning topics, all of which should probably be addressed before spending much time thinking about exactly what is the correct allocation to international bonds or whether index funds are preferable to ETFs.

Insurance planning:

  • Do you have health insurance? (And if it’s open enrollment season, have you checked to see whether there’s a different plan that might be a better fit for your household?)
  • If anybody is financially dependent upon you, do you have sufficient life insurance? (Alternatively, have you canceled any coverage that is no longer necessary?)
  • If you are still working, do you have sufficient disability insurance? (And does the policy check all the necessary boxes? For instance, is it “own occupation” if such is important in your case?)
  • Do you have sufficient homeowners/renters insurance?
  • Do you have sufficient liability coverage on your auto policy?
  • Do you have an umbrella policy?

Cash flow planning:

  • Do you know how much you spend each month (or over the course of a year)?
  • Do you have a sufficient emergency fund? (Of note: a retirement portfolio can often serve as an emergency fund, once it is of sufficient size.)
  • Are you saving enough each month to meet your goals? (Or if retired, are you confident that the amount you are spending per year is sustainable?)

Estate planning:

  • Have you checked the beneficiaries (including contingent beneficiaries) of your retirement accounts and life insurance policies recently?
  • Do you have a will in place?
  • Do you have a durable power of attorney for finances?
  • Do you have a healthcare power of attorney?
  • When was the last time the above documents were updated?
  • Have you considered whether a trust of any sort would help you to achieve any postmortem goals for your assets?

Tax planning:

  • Are you confident that you are contributing to (or withdrawing from) the right types of accounts each year? (For example, should you be making Roth contributions instead of tax-deferred contributions?)
  • Have you considered whether Roth conversions would be useful now or in the near-term future? (Most often, this is helpful during years of retirement prior to RMDs and prior to Social Security.)
  • Do you know whether you are in or near the phaseout ranges (or other thresholds) for any tax credits or other significant tax provisions?

Basic investment planning:

  • Is your portfolio reasonably diversified, as opposed to having a large portion allocated to one stock (e.g., an employer or former employer)?
  • Is the basic allocation (i.e., the stock/fixed-income allocation) roughly appropriate for your risk tolerance?
  • Are you using funds with reasonably low expense ratios?

Basic retirement planning:

  • Do you have a plan for when you intend to retire? (And have you thought through the potential ramifications of being forced into retirement somewhat earlier than the intended date, due to illness, job loss, etc.?)
  • If nearing age 62 (or 60 if you’re a widow/widower), do you have a plan for when you will claim Social Security benefits?

In my opinion, most people should just be using a very simple portfolio (e.g., a basic three-fund portfolio or even a simple all-in-one fund if the portfolio is entirely in retirement accounts) until they’ve taken care of the above items. Using a basic portfolio frees up time and mental energy to focus on other things that matter quite a bit more.

And even for people who have taken care of these other financial planning to-do items, there’s still no need to spend time thinking about particularly advanced asset allocation questions. In nearly all cases, it’s perfectly fine to stick with the three-fund portfolio (or, again, a low-cost all-in-one fund if your portfolio does not include taxable accounts).

To be clear, the above list is not absolutely-super-duper-all-inclusive. For some people there will be additional points in one category or another that should be addressed. Also, the order of priority will vary from one person to another. For example, if you’re unmarried and have no kids, estate planning would be a lower priority than it would be for somebody with children. And estate planning would be an especially high priority for a married couple who each have children from a prior marriage.

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