Tax Guide: A Check-Up for Your Financial Plan

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Chapter 4
Your Year-End Personal Financial Planning Check-Up

inancial 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.

Important!

We've posted our updated tax planning guide. Click here for planning tips and strategies for 1999 and beyond.

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 environment 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 four 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 must determine what insurance coverage you need. These actions will 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 again focus on four actions.

First, you should 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 an 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, you will reap the benefits of your earlier retirement planning. Your concerns 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.

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