Financial planning is an ongoing process, encompassing a wide range of topics and the use of many tools. The process helps you develop strategies to enhance your financial security and leads to the development and refinement of a financial plan based on your goals, plans, and expectations.
Income tax planning is part of a good financial plan. It involves looking at the "big picture" -- both the short-term and long-term goals in your financial plan -- and using the tools available to you to meet those goals.
A good tax plan, as part of a good financial plan, recognizes change.
Not only is the overall financial and tax environments changing constantly and rapidly,
but your personal environment also changes as you face various life events (including
marriage, the birth of children, career changes, and so forth). Successful tax and
financial planning involves periodic reviews of your plans, strategies, and techniques to
make sure that they keep up with changes.
In financial planning, a person is generally considered to have three time periods:
- the Accumulation Years-ages 24 to 45
- the Conservation Years-ages 45 to 65
- the Retirement Years-ages 65 and up
Income tax planning varies during these three periods
Be aware that these three periods may very well overlap, and the age ranges we have
indicated may be different for any given individual. However, certain general guidelines
apply during each period and are discussed below.
During the accumulation years
You will need to lay the groundwork to meet your financial goals throughout your life. You
should focus on five actions. First, you must understand the sources of your income --
compensation, savings, employer-sponsored plans, Social Security -- and plan how to use
these sources to generate the funds you need. Second, you should set out your expected
expenses throughout your life, including those related to housing, children’s
education, and retirement. Third, you need to determine whether your sources of income
will cover your expected expenses. Fourth, you should develop a basic estate plan in the
event of your untimely death. Fifth, you must determine what insurance coverage
you’ll need. These actions help you create and begin to carry out your initial
financial plan.
During the conservation years:
You are earning your peak compensation and have a stronger sense of your financial needs.
You should focus on four actions. First, fine-tune your projected expenses for the rest of
your life to determine the resources you need to accumulate. Second, you must focus on
investments -- are your current investments sufficient and appropriate? What investments
do you have to make to reach your goals? Third, you should start to plan how you want to
handle your retirement funds. Fourth, you should develop a sophisticated estate plan.
These actions help you (1) analyze the effectiveness of your plan and make any necessary
revisions, and (2) put in place the additional plans you need to handle your finances in
the balance of your life.
During your retirement years:
This is when you will reap the benefits of your earlier retirement planning. Your concerns
will focus more on such questions as "What happens if I work part-time?",
"What government funds should I receive (Social Security, Medicare)", and
"how do I get them?" What happens if I need money from my retirement plans? Your
most important actions during these years are to stay alert about your financial status,
talk with financial advisers as needed, and follow developments in the tax-planning
environment that could affect your financial plan.