We’ve all seen dozens of websites with messages like these. The appeal is understandable; they make it sound so simple. Answer a few questions and be handed a single number that promises success. All you have to do is save that many dollars and you’re golden, right? Very black and white, no ambiguity, no “it depends”. Save $X and win! Easy.
No wonder these websites are so popular. They aren’t cluttered up with the realities of life. No contingency plans in case something goes awry. No guessing about your future health, or future tax implications, or intermediary speed bumps in the road. No mention of risks, either, like market risk or interest rate risk.
Good financial planning is about more than just saving. In fact, saving itself is about more than just saving. There are actually different types of saving.

Strategic Plan Design: Like Rooms in a House

Every dollar you save should have a purpose. Trying to save all of your dollars for everything in a single account just doesn’t work as well as segregating them into different categories. Think of each category as a “room” in your financial house. Each room of your financial house should be evaluated through three different lenses:
  1. Risk Level
  2. Time Horizon
  3. Tax Strategy
We typically use five rooms in our strategic plans. For example, we recommend that everyone have a Liquid room in their financial house. This should contain both an emergency fund that could cover three to six months of your fixed expenses, and the dollars that you plan on spending for any special purpose in the next two years.
Let’s examine this room using the three lenses from above. The dollars in your Liquid room should take on zero risk. Period. The appropriate time horizon for this room is 0-2 years. There is no need for any tax strategy for this room because the tax consequences associated with this room are negligible.
Compare that to another of the five rooms, the Retirement room. In order to grow adequately, these dollars need to be subjected to moderate-to-high risk. The time horizon for this room is 10-40 years, depending on how young you are (i.e., how far away you are from retirement). Given the amount of growth we expect in this room, and the corresponding tax consequences, it is essential that we save these dollars in a tax preferential way! How essential? Imagine you could invest your Retirement room dollars in something that would return 8% every year. A single dollar invested at 8% annual growth for 30 years will grow to $10.06. However, if you have to pay 25% income tax each year along the way, that’s the same as only earning 6% instead of 8%. A single dollar invested at 6% annual growth for 30 years will only grow to $5.74. That’s a little over half as much. See why the dollars in this room need a tax preferential way to be saved?

Other Considerations

There may be other factors to consider for each of your rooms. Let’s look again at the Retirement room. This is the money you think you will need in order to afford your retirement. Conventional wisdom says that you should be able to get by on less income than when you were working, but, in our experience, the opposite is often true—especially in the first handful of years. Every day is a potential spending day rather than a work day. Grandkids or other family members to spoil with gifts. Then, the spending honeymoon is over and we often see day-to-day spending return to normal levels. However, this is often accompanied by an increase in spending on healthcare. Vitamins, supplements, prescriptions, more doctor appointments, more specialists to see, home equipment to buy, home modifications to make, home help to be hired. The average couple age 65 today will spend $275,000 on healthcare things that are not covered by insurance1. If you don’t know that, you won’t include that figure in your “magic number”. What other things might you be missing?


So, saving is important. Crucially so. Almost no strategic plan can be accomplished without it. But the puzzle has way more pieces than just that one. A good financial planner shouldn’t just help you solve the problems that you already know you have. They also need to prepare you for all the things that you don’t even know should be a concern. Is your planner doing that? When was your last review? If your planner isn’t up to snuff, it’s time to get a new one! Call a Trilogy Financial Advisor today for a free one-hour consultation. 



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