The importance of financial planning
Financial planning is often an area that takes a back seat in busy lives. When there is no specific deadline to make a financial decision, it is very easy to say that you will address it in the future when life becomes less hectic. Taking the time to review your financial position, your personal wealth goals and objectives and consider the implications of whether your strategy will appropriately meet those goals can be an important exercise. Ensuring that you have an effective and appropriate strategy will likely afford you future flexibility and peace of mind. Below we discuss the areas that are beneficial to consider and review. A few easy steps can ensure optimal wealth planning strategies.
Evaluate and revisit your wealth goals and objectives
The investment process begins by defining your goals and objectives. Consideration should be given to how much money is needed to achieve the goal, the time horizon of the goal and the willingness to take risk to meet that goal.
• What are the goals that need to be considered?
• What are the amounts you need to meet those goals?
• What is the time horizon for each of your goals?
• Do you need an assumed savings target to meet any of the goals? If so, what is the assumed savings target?
• Will you receive any inheritances or gifts that will significantly increase your level of investable assets to help meet any future goals?
Reviewing the above will allow you to work out what growth rates are needed on your investments to meet your eventual needs. This can be very helpful when you assess the performance of your portfolio and whether it is still positioned properly to meet your goals. Once a year, it can be beneficial to sit down with the dedicated purpose of determining whether your current financial targets and the time horizons associated with them are appropriate.
Measure portfolio performance and assess asset allocation
If the first step is evaluating your goals and objectives the next step is to take a closer look at the performance of your current portfolio and determine whether or not it is allocated in a way that will help meet expectations.
If you are falling short of your growth targets, you could consider whether individual investment changes, an increase in your overall exposure to growth assets, an adjustment of your goal or an increase in your level of current savings is needed. If you are exceeding your growth targets, consideration can be given to whether you should decrease your exposure to growth assets or perhaps explore other goals. And, if you are meeting your growth rate targets then your focus can move to asset allocation and tax-efficiency.
A sound wealth plan is built around an appropriate asset allocation. Different asset classes will perform better than others during different time periods and a diversified portfolio of assets will help to ensure that you benefit from the outperformance of each asset class as and when it is realised. This varying performance will likely lead to what is called style drift within the portfolio. An annual rebalance will help ensure that you maintain an optimal risk and reward trade-off for your set of financial goals.
Maximise the tax-efficiency of your wealth plan
In light of the above, consideration should be given to how to meet your goals in the most tax-efficient and optimal manner. You want to make sure you have a good understanding of the tax opportunities available to you and your individual situation. Investing in a tax-efficient manner will help ensure that you do not need to make your capital work harder than it needs to for you. For retirement specific goals, one should look to take advantage of appropriate tax deferred growth vehicles. In addition, one you should seek to asset locate investments to achieve maximum tax efficiency. For instance, in general, dividends and capital gains receive more favourable tax rates. Therefore, these investments should be held in taxable accounts. Whereas, interest income is taxed as ordinary income and can be optimally sheltered in tax-deferred accounts. Additionally, consideration should be given to whether assets could be more optimally placed in a spouse’s name based on tax status or overall relative income position.
Consider your inheritance tax planning and estate provisions
Your estate provisions and any inheritance tax planning, whether basic or more complex, should be taken into account when undergoing financial planning. Even if you have previously put a plan in place the suitability of that plan may evolve as a result of a change in your financial situation or a family event. Life events such as getting married or divorced, the death of a spouse or close relative, having children, purchasing a new home, a change in citizenship among members of your family, or an increase in net worth may all trigger a need to review your estate plan.
Undergoing a review of your financial life allows you to maintain a clear picture of where you stand financially. It is an opportunity to ensure you are on track to meet your goals and help identify areas in need of adjustment. Being pro-active allows your plan to evolve as your needs change and leaves you with a level of comfort that you have implemented an optimal strategy to meet your needs.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.