More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Cafeteria Plans The income tax treatment of cafeteria plans is key to their popularity. Learn how to maximize the tax benefits of these “flexible benefit plans”.
In something of a surprise, new research sponsored by the Consumer Federation of America and Certified Financial Planner Board of Standards finds close to nine in ten American households are engaged in some type of formal or informal financial planning.
However, the extent of this planning varies greatly, and will generally fall into one on four behavioral areas identified by the organizations: comprehensive planners, basic planners, limited planners and non-planners.
The research shows that only one in five household decision makers are comprehensive planners, or those who take a methodical approach to financial planning, while one in ten do virtually no financial planning at all. The research further identifies nearly two-fifths of households as basic planners and one-third of households as limited planners.
“I was most surprised by the number of Americans involved in planning,” said Stephen Brobeck, CFA’s executive director. “Yes, the degree to which they’re planning does vary, but I thought the number of people that do not do any planning would be much higher.”
One of the most compelling findings, according to Brobeck, is that the more extensively households plan, the better prepared they are financially in terms of their likelihood of saving, investing and managing credit card debt. That in turn leads to higher effectiveness in saving, investing, and debt management, as well as higher confidence in managing their finances.
Additionally, while higher income households are more likely than lower income households to plan, more than half of comprehensive planners have annual incomes below $100,000.
“Low to moderate income workers usually don’t have access to employer-sponsored plans,” Brobeck noted. “But they do have access to saving accounts. Even if it’s $25 a month, it will greatly help them. It’s not about the amount so much as it is the behavior.”
Extensive analysis of the four distinct financial planning profiles includes:
- Comprehensive Planners (19%): All members of this group have a comprehensive financial plan that goes beyond a simple household budget to cover things like retirement savings and insurance. Two-thirds (67%) of comprehensive planners used a financial professional with fiduciary accountability, specifically a certified financial planning professional or a registered investment advisor, to help prepare such a plan. These households have specific savings goals as well, with 88% having a specific plan for retirement and 80% having a plan for emergency savings.
- Basic Planners (38%): The large majority of basic planners (80%) have a plan for one or more specific savings goals, though only 35% have a comprehensive plan that organizes these plans, with another 31% saying they are likely to make a plan in the coming year. While two-thirds (66%) say they have a household budget, fewer than half (41%) say that budget is written down or stored in electronic format.
- Limited Planners (33%): A large majority of limited planners (69%) either have a household budget or a plan to address at least one individual savings goal – typically for retirement savings – but not both. And very few limited planners (11%) think they will make a comprehensive plan in the next year. But most (91%) either have no credit card debt or have a plan to pay off this debt.
- Non-Planners (10%): This group does virtually no financial planning. Nine in ten (92%) say they have no plan for any specific savings goal, and virtually none (99%) think they will create a comprehensive financial plan in the next year. They also are the group with the most difficulty managing credit card debt. Four in 10 have credit card debt that needs to be paid off and fewer than half with this debt have a plan to pay it down.
The higher one’s household income and level of education, the more likely one is to engage in financial planning, the survey finds. Among comprehensive planners, close to half report annual household incomes of at least $100,000 and about half have a four-year college degree. Among non-planners, more than half half have incomes under $25,000 while more than two-thirds have a high school education or less.
But these correlations are far from perfect, the survey adds. The majority of comprehensive planners are middle class, it notes. In fact, a quarter have incomes below $50,000.
“The failure of middle-class incomes to grow is as big a problem as any facing the country today,” Brobeck concluded.