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What Financial Advisors Need to Know

Family financial planning can be essential for ensuring that a household’s financial future is secure and its goals are met. As a financial advisor, it is your job to educate clients on the importance of financial planning—not only for individuals but for all members of the family—and provide them with the necessary tools and guidance to develop a comprehensive plan.

A well-crafted family financial plan can help set clients on the right financial path, save for important milestones, and protect their loved ones from unexpected events. Lean more about family financial planning below.

Key Takeaways

  • Crafting a financial plan for a family differs in some important ways from individual planning, and financial advisors serve as key guides in this process.
  • Family financial planning encompasses various aspects, including budgeting, goal setting, debt management, college planning, retirement planning, insurance coverage, and estate planning.
  • Educating clients on the importance of financial planning and providing them with the necessary steps and guidance are key responsibilities of financial advisors.
  • Involving the entire family in the financial planning process can help ensure that all members understand their responsibilities and contribute to the plan’s success.

What Is Family Financial Planning?

Family financial planning is a systematic process that involves assessing, managing, and optimizing a family’s financial resources to achieve specific short-term and long-term goals while ensuring financial security and stability.

As a financial advisor, you are already familiar with the basic principles of financial planning. However, when working with families, the process becomes more complex—it requires taking into account the financial needs, aspirations, and risk tolerance of multiple family members.

The primary goal of family financial planning is to establish a comprehensive road map that addresses the diverse financial needs and objectives of each family member while ensuring overall financial stability and growth. Your role is to guide families through this process by providing expert advice, valuable insights, and customized solutions that cater to their specific circumstances and goals.

How to Create a Family Financial Plan

A comprehensive financial plan should be holistic but also tailored to the specific needs of a family. This requires a deep understanding of each family member’s financial goals, values, and priorities. Financial advisors must actively engage with their clients, asking the right questions, and carefully listening to their concerns and aspirations.

By doing so, financial advisors can develop customized strategies that not only address the financial needs of the entire family but also align with their specific circumstances, risk tolerance, and long-term objectives. This personalized approach helps build strong client relationships, ensuring that the family financial plan remains relevant, adaptable, and effective in achieving the desired financial outcomes.

In particular, financial advisors should touch on the following points, among others.

Budgeting and Spending

A family’s expenses are inherently larger than an individual’s would be. With multiple family members, there will be more mouths to feed, more clothes to buy (and wash), and more activities to do. Plus, it’s likely that the family has a larger space to pay for, which may come with higher rent or even a mortgage, and consequent upkeep.

Financial advisors should ask clients about their current spending habits and help them establish a realistic budget. They should encourage clients to track their expenses and identify areas where they can cut back if possible or necessary. When appropriate, financial advisors should also try recommending strategies for reducing expenses and increasing savings, such as using coupons, meal planning, and utilizing public transportation.

An emergency fund is essential for families to cover unexpected expenses, such as job loss, medical emergencies, or unforeseen home repairs. Financial advisors should help clients determine the appropriate size of their emergency fund, which according to experts is typically three to six months’ worth of living expenses, and recommend strategies for building and maintaining this fund.

Establishing Financial Goals

While individual financial goals often focus on personal aspirations and one’s own retirement, family financial planning involves considering the goals of multiple family members. This can include saving for a home, raising children, and ensuring a comfortable retirement for both spouses.

Financial advisors must help clients balance and prioritize these various goals to create a comprehensive plan that works for the entire family. For example, one financial goal that a financial advisor may discuss with a family who has children is setting up a 529 plan when their child is young. That way, the parents are planning for a college education from the get-go and allocating funds for that goal along the way.

Allocating Resources

In a family financial plan, resources must be allocated efficiently to meet the needs and priorities with all family members in mind. This may involve establishing joint and custodial bank accounts, creating a budget that accounts for shared expenses, determining how much to save for specific goals, and deciding on appropriate investment strategies. It can also involve setting up tax-advantaged accounts for different family members, such as individual retirement accounts (IRAs).

Financial advisors play a crucial role in helping families make informed decisions about resource allocation to maximize their financial potential.

Saving for College

A college education is crucial for personal development and landing a good job, but going to college is expensive. According to 2023 data from the Education Data Initiative, the average cost of attendance for a student living on campus at a public four-year, in-state institution is $26,027 per year, or $104,108 over four years. Out-of-state students can expect to pay $27,091 per year, or $108,364 over four years. Private, nonprofit university students pay even more: $55,840 per year, or $223,360 over four years.

Saving for a child’s college education is, therefore, a significant concern for many families. Financial advisors should guide clients in exploring various college savings options, such as aforementioned 529 plans and Coverdell Education Savings Accounts (ESAs). They should also help clients determine how much to save, taking into account factors such as tax minimization, projected college costs, financial aid, and the family’s financial situation.

Healthcare Concerns

Families often have different healthcare needs compared with individuals, including coverage for dependents and spouses. Financial advisors should help clients understand their healthcare options and select appropriate health insurance plans based on their family’s needs and budget. Additionally, financial advisors should discuss strategies for saving for future healthcare expenses, such as Health Savings Accounts (HSAs) and long-term disability insurance.

Insurance Protection

Insurance coverage is essential for protecting a family’s financial future. Financial advisors should assess clients’ current insurance policies and recommend additional coverage if necessary.

This should include life insurance to provide for dependents in the event of an untimely death, long-term disability insurance to replace income in case of serious illness or injury, and property and liability insurance to protect the family home and other assets. It can also include long-term care (LTC) insurance for when parents grow older and need eldercare.

Retirement Planning

For many families, retirement is a shared aspiration. Assessing clients’ retirement goals and helping them develop a plan to achieve those goals is an essential aspect of family financial planning. A successful retirement plan for couples, if relevant, involves a comprehensive and coordinated approach to ensure that both individuals have resources and financial strategies that work for them.

As their financial advisor, you should encourage your clients to contribute to their employer-sponsored retirement plans, such as a 401(k) or 403(b), and take full advantage of any available employer match. These plans offer tax advantages and potentially higher contribution limits compared with other retirement savings vehicles. In addition to employer-sponsored plans, you should recommend that both spouses set up IRAs—either traditional or Roth—depending on their income, tax situation, and eligibility.

IRAs provide additional tax benefits and investment flexibility, allowing couples to diversify their retirement savings and optimize their long-term financial strategy. You should encourage clients to consistently contribute to their retirement accounts, even during market downturns or periods of uncertainty. Additionally, stress the importance of periodically reviewing and rebalancing their investment portfolios to maintain the desired asset allocation and risk profile.

As your clients get older, discuss the optimal timing for claiming Social Security benefits for both spouses, taking into account their ages, life expectancies, and potential spousal or survivor benefits. Help them develop a strategy for generating a steady income stream from their retirement savings while also taking into account tax implications, required minimum distributions (RMDs), and potential changes in spending patterns during retirement.

Legacy Planning

In addition to life insurance, legacy planning involves creating a strategy for preserving a family’s wealth and passing it on to future generations. This can include estate planning, such as creating a will or establishing a trust, as well as tax planning strategies to minimize estate taxes if that becomes relevant. Advise clients on the importance of having a will, power of attorney, and healthcare proxy in place. Discuss options for preserving wealth and minimizing taxes through trusts, gifting strategies, and charitable donations.

Financial advisors should work with attorneys trained in estate planning to guide clients in developing a comprehensive legacy plan that aligns with their values and long-term financial goals.

Tax Planning

Families often have more complex tax situations than individuals have, due to factors such as multiple income sources, dependents, and potential deductions or credits. Financial advisors, in conjunction with licensed tax professionals, should help clients understand the tax implications of their financial decisions and provide guidance on strategies to minimize their tax burden.

Why Does a Family Need a Financial Plan?

Family financial planning takes into account the needs of each family member and how they interact with everyone else’s needs to create a holistic plan. A financial plan provides a road map for achieving financial goals and ensuring a secure future for the entire family.

What Is the 50/20/30 Rule?

The 50/20/30 rule is a budgeting guideline that allocates 50% of income to essential expenses, 20% to savings, and 30% to discretionary spending.

What Are the Main Rules of Financial Planning?

Financial planning should be a flexible process that accounts for the specific needs of individuals and families, and it should adapt over time. Some of the main rules of financial planning include setting clear goals, creating a reasonable budget, investing in ways that correspond with one’s risk tolerance, ensuring the appropriate level of insurance protection, monitoring and adjusting the plan as needed, and seeking advice from others when necessary.

The Bottom Line

Family financial planning involves assessing and managing a family’s financial resources holistically, addressing the specific needs and goals of each family member. This comprehensive approach includes essential aspects such as budgeting and spending, setting financial goals, debt management, college planning, retirement planning, insurance coverage, and estate planning.

It is crucial for a financial advisor to educate clients on the importance of financial planning and provide them with the necessary tools and guidance to develop a customized plan. By involving the entire family in the process and addressing each aspect of their financial lives, financial advisors can help clients achieve financial security, meet their long-term objectives, and protect their loved ones from unexpected events.