Key Takeaways:
Contributing to a 401(k) or IRA is a start, but without a financial plan, those accounts are just tools without a roadmap.
Contributing to a 401(k), IRA, or brokerage account is not the same as having a financial plan, says John Jones, a certified financial planner at Heritage Financial who maps three retirement phases.
"Those accounts are just tools," Jones said. "The actual plan is a road map for how those tools should be used to help achieve financial goals."
Portfolio statements provide a snapshot of balances and returns but don't explain how investments will be used to meet goals. Two individuals can hold identical portfolios with very different strategies — someone retiring in the next few years faces different risk considerations and income needs than someone decades from retirement. Tax planning is another gap: investment accounts are taxed differently, so where money is saved and how it's withdrawn can significantly affect tax burden.
Without a plan, pre-retirees risk higher tax liabilities on withdrawals, misaligned investment risk, and unaddressed estate wishes. Financial plans are designed to adapt to life changes — a new job, marriage, birth of a child, or approaching retirement — rather than market changes. The early years of retirement, or go-go years, might involve travel and new experiences, while slow-go and no-go years shift priorities toward healthcare.
Portfolio statements can tell you what type of accounts you're invested in, but they don't explain how withdrawals will be taxed or whether money is in the appropriate account based on your situation. Since investment accounts are taxed differently, where money is saved and how it's taken out can significantly impact tax burden. With a complete financial plan, pre-retirees can understand how assets are intended to be distributed across retirement accounts and how withdrawals can be managed to reduce tax liabilities. Tax rules change periodically, so retirees should verify current withdrawal tax treatment against the latest IRS guidance.
Although a portfolio statement might list beneficiaries, it doesn't account for greater estate planning needs. Some people might want to leave assets to children or grandchildren, while others might decide to donate to charity or set specific guidelines for how their wealth should be distributed. A financial plan helps make sure those wishes are incorporated into the overall strategy.
Paying attention to investment returns is important, but they're only one piece of the pie. A portfolio statement can give a snapshot of current beneficiaries, various retirement accounts, and current investment performance. It's the plan that helps determine whether those investments support financial goals. As retirement approaches, updating the plan to reflect changing priorities — from travel in the go-go years to healthcare in the no-go years — becomes as important as the initial contributions themselves.
This article is for informational reference only and does not constitute professional investment advice.
