Answers to 12 Top Long-Term Financial Planning Questions

When people come to Aspiriant seeking financial advice, we often start by asking them about the purpose of their money. We explore their money scripts (the attitudes and behaviors about money they were raised with) and develop a financial plan that fits their goals. We encourage them to think long-term when it comes to investing and other financial matters.

As we have these discussions, certain questions usually pop up again and again. Every client is unique, and we develop bespoke plans for their needs. But here are general answers for 12 common questions about long-term financial planning.

1. How does my spending compare to others in my zip code? Am I spending too much? Too little?

A: It depends! The tendency to compare one’s spending to others for reassurance (or permission) is hard to resist. However, the best way to answer this question is to go through a financial planning process that considers your goals, assets and future earnings, along with your risk appetite as an investor and an assumption around your remaining lifespan. A personalized financial plan will provide the right context to decide what level of spending is right for you.

2. How do I know if I have enough assets to retire?

A: You should consider more than your just your assets when thinking about retirement. Assessing your retirement goals (What will your life look like when you retire?), implementing a retirement plan, and running financial scenarios as your life evolves can help you determine whether you’re on track for retirement.

3. What’s the best type of retirement savings account?

A: If you are fortunate enough to work for an employer that offers a 401(k), it should be your first-choice retirement account. You can save more money in a 401(k) than in an IRA each year. For 2022, 401(k) savings can total $20,500, plus an additional $6,500 if you’re 50 or older. IRA savings are generally limited to $6,000 ($7,000 if 50 or older). But your IRA contribution limit may be reduced depending on your income. Some employers will also match a portion of your 401(k) contribution, so be sure to take advantage of that extra income opportunity. Once you’ve fully funded your 401(k), then save in an IRA.

Typically, saving in a Roth version of either type of retirement account may help you save taxes in the long run, especially if you’re at the beginning of your career. When your salary is lower, you’ll pay less in income tax today. Then when you qualify to withdraw your retirement funds, you won’t have to pay taxes later. Traditional versions allow you to save money pre-tax, so if you’d prefer to keep your tax bill lower today, you may want to consider saving some funds in a traditional 401(k) or IRA account.

4. What is the best way to save for college?

1: A college savings 529 plan is typically the best option for most families. Parents or grandparents can start an account for a beneficiary student. The assets in a parent’s account will not be counted toward financial aid eligibility. And the income is tax-free if spent on qualifying educational expenses.

If you have abundant assets and are more concerned about avoiding estate taxes than obtaining financial aid, other options include UTMA/UGMA accounts, Crummey trusts, and grantor retained annuity trusts. Each of these strategies has benefits and drawbacks that you should discuss with a wealth manager and estate planning attorney.

5. Is this a good time to invest? I’ve been sitting on cash and am not sure if it’s a good time to get into the market.

A: Yes. During today’s bear market, you can buy stocks at a better bargain than just a year ago. Ten years from now, you’ll likely be better off having invested today. Given all the volatility in the markets these days, you might consider a dollar cost averaging (DCA) program where you invest the same amount over a period of three to six months. For example, if you have $600,000 in cash, you could DCA $100,000 per month for six months. Keep in mind that we’re experiencing the highest rate of inflation in 40 years, so while it might feel comfortable in the short run to be out of the market, you actually do yourself more harm than good in the long run. If you’re sitting in cash, you won’t benefit from the early weeks of the recovery, which typically have some of the best returns in most market cycles. Additionally, your cash is actually losing purchasing power each year due to inflation.

6. What are the steps I should take in advance of an IPO?

A liquidity event, such as an IPO, can be transformative … but it can also feel overwhelming. You’re more likely to be successful in managing your equity if you plan early and think holistically. Start by building a team of experts to walk you through the complicated parts. A wealth manager can help you identify your priorities and create a long-term financial plan to meet your goals. A tax advisor will guide you through strategies that minimize taxes before, during and after the transaction. And an estate planning attorney can set up charitable giving strategies and other strategic planning documents for your assets.

7. How can I reduce long-term capital gains taxes?

Any long-term investor is likely to experience periods of volatility and, subsequently, investments that fall in value. While you may instinctively want to wait to see if they recover, selling at least some of the shares at a loss can offset any investment gains you’ll have to report to the IRS. This technique is called tax loss harvesting and usually involves immediately reinvesting sale proceeds in similar (but not identical) investments to maintain your diversified portfolio. During down markets like today, tax loss harvesting can help turn lemons into lemonade.

8. Should I lease or buy a car?

When it comes to leasing vs. buying outright (financing or all cash), it’s generally better to buy if you think you’ll have the car for a long time and will put on significant miles. There can be additional charges associated with leasing due to mileage restrictions, rules around returning the car in good condition, and early termination fees (depending on the terms of the lease). If you buy a car and drive it for a long time, the value you’ll get out of it is greater than the cost of continually having to make monthly lease payments. Over the long term, the highest value approach is to buy a car and keep it until it’s no longer worth the cost of repair. However, for people who enjoy a newer model vehicle and don’t drive significant miles, leasing may be the best choice.

9. What are the most important documents a couple should have for estate planning purposes?

A: A basic estate plan for most people should include five documents: A living trust, a will, assignment of assets, durable power of attorney and health care documents. These legal documents will allow your heirs to avoid the courts and follow your intentions for your assets and health care when you’re gone or physically unable to make important decisions.

10. We have a living trust. Should everything, including our IRAs, be included in it?

A: Your living trust is an important part of your life plan. It allows you to avoid probate, which is costly and time consuming. Your IRA, as well as other retirement plans and life insurance proceeds, avoid probate if you designate your trust as the beneficiary. Double check to make sure you have correct, up-to-date beneficiary designations on all IRAs, retirement accounts and life insurance policies.

11. Why is titling our assets so important, and what impact can it have on our planning?

A: Coordinating account titling and beneficiary designations with your will and living trust is a critical, yet often overlooked, element of a successful estate plan. Incorrect or mismatched titling can cause your assets to pass in a manner other than the way in which you intended and lead to a complex estate administration process, increased taxes and even lawsuits among heirs. Consult an estate planning attorney to be sure assets go to the intended heirs seamlessly.

12: How much money do most of your clients leave to their kids?

A: There’s no set approach. A few clients seem to want to beggar their own lifestyles so their children will have more money. Others want to help their kids get a start in life but then manage on their own. Most who can afford it try to estimate an amount of money that is sizeable but not over the top. A client’s own history with their parents and the money scripts they were raised to follow may play into how they think about this question. Discussing your family values with a wealth manager can help you parse out your thoughts and set inheritances mindfully and with confidence.

(Thanks to the following Aspiriant wealth managers who contributed to this post: Karen Blodgett, John Collins, Mike Fitzhugh, Paul Hynes, Mary Ellen Krueger, David Muchow, Talia Pierluissi, Jason Shemtob and Michelle Hauslein.)