Essentials of Financial Planning, Part 1

A customized, well- designed financial plan should be discussed at the inception of most investment advisory relationships. A financial plan encompasses all areas important to a significant estate including investment management, debt management, tax minimization, trust and estate planning, risk mitigation, philanthropic planning, education and financial independence. The primary purpose of a financial plan is to bring confidence and peace of mind to clients as they make significant wealth decisions.

The first step in financial planning is data gathering; a series of questions determine client goals in the areas of risk tolerance, liquidity needs, spending needs, time horizon, philanthropic goals, sources of income, family dynamics, family and charitable gifting, and asset and entity information. With this information, the financial planner gathers relevant documentation such as asset statements, wills, trusts, tax returns, property and casualty and life insurance statements.

The ability to achieve retirement, or financial independence, is often the main objective of financial plans. Typically, this means that a client stops working and generating employment income and requires enough savings to live a specific lifestyle until life expectancy. Financial independence is the flexibility to retire without the desire to retire. Many clients continue to work because they’re capable and enjoy it well beyond the point where they are financially capable of retiring.

In order to determine if a client is financially independent, the financial planner needs to determine “critical capital,” or the amount needed to be liquid and diversified, so the client can achieve financial independence. Determining critical capital takes into account all existing income sources that the client has over a lifetime including employment income, passive income such as real estate, social security, and mandatory distributions from retirement accounts. It also takes into account spending requirements such as day-to-day lifestyle, large one-time transactions such as new homes and education for children.

At Callan Capital, we show conservative linear growth rates for various asset classes. In addition, we run a Monte Carlo analysis which takes into account thousands of possibilities on asset returns and shows the client a probability of success, or certain outcomes by running multiple simulations using certain variables.

If a client has a high probability of success and will likely never outlive their money, we discuss more sophisticated strategies of transferring excess wealth to the next generations or a charity of choice, thus reducing the amount that goes to the IRS. All estates will be taxed at 40% on amounts over $5.43mm for a single person or $10.86mm for a married couple. Usually, clients want to look at ways of minimizing the estate and income tax through gifting techniques to family and/or charities.

Risk mitigation within a financial plan takes into account areas of the plan that would be severely impacted if a specific event were to occur. For example, the death of the income earning spouse, or a creditor claim filed against the family are both events that could deplete savings. To mitigate risk, property and casualty insurance as well as asset protection trusts (in the case of higher risk employment) are utilized.

The peace of mind offered by a well-constructed financial plan is invaluable to help clients navigate periods of market volatility. Through the financial planning process, clients gain clarity, direction and discipline over the financial choices they make everyday.

Disclaimer: * Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at

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