Financial Planning Horror Stories and How to Avoid Them
Ghosts. 👻 Zombies. 🧟 Haunted houses. 🏚️ Children wearing masks and demanding candy under vaguely threatening circumstances. 🍬
Financial planning has its own horror stories and unfortunately, these occasionally come with actual consequences.
And the really scary ones usually aren't about the stock market crashing or someone putting their life savings into a cryptocurrency named after a dog. They're usually much more ordinary.
Nobody asked a question. Nobody connected the dots. Somebody assumed somebody else was handling it. Or everyone agreed on exactly what needed to happen and then nobody actually did it.
So, in honor of Halloween, here are four financial planning horror stories inspired by situations we've encountered over the years. Names and details have been changed, combined, and generalized. The lessons, unfortunately, are quite real.
Horror Story 1: The Retirement Plan That Worked Until Retirement
Let's begin with a couple who did almost everything right.
They saved diligently. They contributed to their 401(k)s. They accumulated a healthy investment portfolio. Their house was nearly paid off.
For decades, the answer to the question “Are we going to be okay?” had essentially been: Yep. Keep saving.
Then retirement arrived.
Suddenly, a much more interesting collection of questions appeared.
- Which account should they spend from first?
- Should they take Social Security now or wait?
- How much could they reasonably withdraw each year?
- What happens to their tax bracket when required distributions begin?
- Should they convert some IRA money to Roth before then?
- Where does Medicare fit into all of this?
- How much cash should they keep?
- What happens if the market drops 25% during their first few years of retirement?
Their investment accounts had balances but their financial plan had questions. Lots of them.
This is a surprisingly common transition in financial planning. During the accumulation years, success can sometimes be measured with a fairly simple scoreboard: Save more. Invest it. Repeat for 30 years.
Retirement is different. Now the accounts have to work together. Investments, taxes, Social Security, Medicare, spending, estate planning, and risk all start bumping into one another.
The problem wasn't that this couple had failed to save enough.
The problem was that nobody had helped them understand how all the pieces were supposed to work together.
The lesson: Understand
Before we start recommending things, we want to understand the whole picture.
What do you own? What do you owe? What income is coming in? What are you trying to accomplish? What worries you? Where are the tax landmines? And what happens if life refuses to follow the spreadsheet?
A pile of investment accounts isn't a financial plan. It's a pile of investment accounts.
Horror Story 2: The Portfolio With a Little Bit of Everything
Our next client had been financially responsible for decades. Perhaps a little too financially responsible.
They had:
- a 401(k) from an old employer
- another 401(k) from another old employer
- two IRAs
- a brokerage account
- an annuity purchased sometime during the Bush administration
- several mutual funds accumulated from a previous advisor
- a bank CD
- another bank CD
- six figures of company stock that had started as a relatively small position many years ago and quietly grown into something considerably more interesting
- a checking account at a bank the client continued using primarily because changing banks sounded exhausting
Nothing was necessarily wrong. That was almost the problem.
Over 30 years, the household's financial life had accumulated layers like geological sediment.
Every job change added an account. Every advisor added a few investments. Every financial decision left behind a souvenir.
Eventually, nobody could answer some fairly basic questions.
- How much risk are we actually taking?
- What does all of this cost?
- Why do we own this fund?
- What percentage of our money is really tied to one company?
- What exactly does this annuity do? - A personal favorite
There are few experiences in financial planning quite like opening a 73-page annuity statement and realizing the answer may be on page 54.
Maybe
Complexity has a way of sneaking into financial lives. Nobody wakes up one morning and says, “You know what would really improve retirement? Seventeen accounts and a filing cabinet.” It just happens.
The lesson: Simplify
Simplifying doesn't mean everything needs to be consolidated into one account or that every financial product should be replaced. Sometimes complexity has a purpose. But complexity should have to defend itself.
If there isn't a good reason for something to be complicated, we'd prefer that it wasn't.
A good financial plan should help you see your financial life more clearly not require an archaeological expedition every time you want to know what you own.
Horror Story 3: The Tax Plan That Started After the Business Was Sold
This one begins with some very good news.
After decades of building a successful company, a business owner received an attractive offer. The buyer was serious. The attorneys got involved. Numbers went back and forth. Documents were drafted. Terms were negotiated. Eventually, everyone agreed.
The papers were signed. The business was sold. There may even have been champagne. Then came the question: So…what can we do to reduce the taxes?
Cue the ominous music.
There may still be planning opportunities after a transaction. But many of the most interesting tax-planning conversations surrounding a major sale are considerably more useful before the sale becomes a completed transaction.
- How is the sale structured?
- What is actually being sold?
- What is the owner's basis?
- How will different portions of the transaction be taxed?
- Are there charitable goals?
- Could an installment structure make sense?
- Are there estate-planning considerations?
- What does this do to the owner's income in the year of sale and potentially the years surrounding it?
These are excellent questions but they are considerably less excellent when first asked after closing. The frustrating part is that everyone involved may have been very good at their job.
The attorney understood the transaction. The CPA understood the tax return. The financial advisor understood the investments. The business broker understood the deal. The problem was that each professional was standing in a different room. Having several good professionals is not necessarily the same thing as having a professional team.
The lesson: Coordinate
Financial decisions have an annoying habit of crossing professional boundaries. An investment decision can create a tax consequence. A tax strategy can affect an estate plan. An estate-planning decision can change how assets should be titled. A business transaction can touch virtually everything.
That's why coordination matters.
Sometimes the most valuable thing a financial advisor can do isn't produce another recommendation. It's get the right people on the same call before something irreversible happens.
Horror Story 4: The Beautiful Trust That Owned Absolutely Nothing
Our final story begins in an attorney's office.
The client did exactly what responsible people are told to do. They created an estate plan. There was a will. There were powers of attorney. There were healthcare documents. And there was a beautifully drafted revocable living trust. Everything was signed. Everything was notarized. Everything was placed into an impressive binder thick enough to suggest that death itself had now been properly organized. The binder went home. The trust went into effect.
And then... Nothing.
The house that was supposed to be owned by the trust remained individually titled. An investment account that was supposed to be retitled never was. Other assets that were supposed to coordinate with the estate plan remained exactly where they had been before the attorney drafted anything. The trust existed. The assets existed. Unfortunately, they had never been properly introduced. This is the estate-planning equivalent of building a garage and forgetting to put the car inside. And the worst part is that an implementation problem like this can sit quietly for years. The documents look official. The binder looks official. Everyone assumes the estate planning is finished. Until someone dies. That is a particularly inconvenient time to discover unfinished homework.
The lesson: Implement
A recommendation isn't valuable because it appears in a financial plan. It's valuable when somebody actually does it. Accounts need to be opened. Beneficiaries need to be changed. Assets may need to be retitled. Insurance needs to be applied for. Portfolios need to be adjusted. Tax strategies need to be communicated to the CPA.
Implementation isn't the glamorous part of financial planning. Neither is flossing. Both become considerably more interesting when ignored long enough.
The Monster Usually Isn't the Market
There's something all four of these horror stories have in common.
None of them required predicting the stock market. Nobody needed to know where interest rates would be next year. Nobody needed an exotic investment strategy or a 147-page financial plan. They needed four much less exciting things.
- Understand. Know what you have, where you're going, and what could get in the way.
- Simplify. Remove unnecessary complexity so you can actually see what's happening.
- Coordinate. Make sure the professionals helping you aren't solving different pieces of the same puzzle without talking to one another.
- Implement. When everybody agrees something needs to happen, make sure it actually happens.
Those four words aren't particularly sexy. That's intentional.
At Forge, we don't think good financial planning should make your life more complicated. We think it should help you understand what's happening, simplify what can be simplified, coordinate the people involved, and make sure the important stuff gets done.
Because most financial horror stories don't begin with someone making one spectacularly terrible decision. They begin much more quietly. Nobody noticed. Nobody asked. Nobody coordinated. Or nobody followed through. Halloween is a perfectly good time for scary stories.
Your financial plan shouldn't be one of them.
Any opinions are those of Forge Financial and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
This includes a hypothetical situation and not indicative of any specific situations or client. It is presented only as an example and not intended as investment advice. Investing involves risk and there is no assurance that any investment strategy will be successful.
Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.
