An ancient wise man once observed, “To every thing there is a season, and a time to every purpose under the [sun]….” The reality of this sage observation is nowhere more evident than in the way individuals’ financial needs change over the course of their lifetimes.

Financial Planning Process

No matter what age they are, people need to know: (1) what they have; (2) what they need and want; (3) how they’re going to meet their needs and achieve what they want; (4) whether their plan is working; and (5) what changes they have to make and how to make them. They will need to monitor their financial plans and objectives constantly and adapt them to changing circumstances. This requires a clear vision of their goals and constant vigilance on their part and on the part of their advisors. Take, for example, the following case of a fictitious couple, Bill and Nancy Brenner:

Getting Started. Bill and Nancy, a young working couple getting started in life, want to establish financial safety and security. Bill is a young architect who works for a small firm. Nancy is still a full-time accounting student who is preparing to become a CPA. She works part time as an administrative assistant while she completes her degree.

Their financial objectives include ensuring financial stability, establishing an emergency savings fund, avoiding consumer debt, building modest savings for retirement, and developing contingency plans for death, disability or financial setbacks.

Bill’s longtime friend, Dave Jenkins, is a financial planner who works with the Brenners. Dave helps Bill and Nancy realize that they must discipline themselves to prepare for future needs. Bill contributes to his 401(k) retirement plan only the minimum amount needed to obtain his employer’s matching contribution. Nancy makes contributions to a traditional IRA. In addition, they follow Dave’s recommendation and buy $250,000 term life insurance policies on each of them. They also keep a few hundred dollars in CDs as an emergency fund.

Early Accumulation Years. Over the next 10 years, the Brenners start their own architectural and CPA firms, buy a house, and have two children, Jacob and Melissa. They continue their existing financial objectives but add educational savings and increased retirement savings and insurance amounts to their plan.

Dave’s architectural firm has five other employees, while Nancy employs an administrative assistant. Upon Dave Jenkins’ recommendation, they establish a 529 qualified tuition plan for their children, convert their term coverage into permanent universal life insurance, and increase their life insurance coverage to $1 million each. They also purchase disability income insurance for themselves and a $100,000 universal life policy on each of their children.

Dave’s firm establishes a SEP IRA that makes annual contributions of 15% of each employee’s salary. Nancy, whose firm does not have a pension plan, still contributes to her IRA. The Brenners also begin investing in mutual funds, with an emphasis on long-term growth and income funds.

Primary Accumulation Years. Bill and Nancy continue their existing qualified and nonqualified savings arrangements. However, they increase the amounts of their nonqualified investments and their life and disability insurance coverage. With an estate of $5 million, they plan for the possibility of estate taxes by purchasing a $2 million survivorship UL policy in an irrevocable life insurance trust.

To obtain moderate, steady growth in their nonqualified portfolio, Bill and Nancy invest in a diversified mix of stocks, bonds, money market accounts and deferred annuities. The children complete college and Melissa becomes an architect like her father and joins his firm. Nancy’s CPA practice provides steady income that allows her to purchase a beach house for the family.

Pre-Retirement Years. Bill and Nancy decide they would like to retire together at ages 62 and 60, respectively. Bill wants Melissa to take over the architectural firm, which now has grown to 20 employees and is worth $8 million.

Melissa and Bill execute a buy-sell agreement that lets Melissa purchase the business when Bill retires by means of a self-canceling installment note. Since Bill’s business makes up two-thirds of the Brenner’s taxable estate, estate equalization can be achieved by having Jacob, who is now a physician, buy a $4 million policy on his father’s life. Nancy, meanwhile, has an agreement to sell her practice to a young CPA.

Retirement and Beyond. Thanks to the assistance of their advisor and a carefully thought out, well-managed financial plan, Bill and Nancy have sufficient income for a comfortable retirement, have provided for business succession, and transferred wealth to their children with little or no shrinkage in their estate.

Richard Baier, JD, CLU, ChFC, FLMI, is assistant vice president-advanced sales at Jefferson Pilot Financial, Greensboro, N.C. You can e-mail him at richard.baier@jpfinancial.com.

People need to monitor their financial plans and objectives constantly and adapt them to changing circumstances