Key Elements of a Comprehensive Financial Plan, Ep. #220

In this episode of the Capitalist Investor podcast, Derek, Tony, and Luke discuss the importance of financial planning and its key elements. They delve into the nuances of creating comprehensive financial plans and how they can provide a crystal ball insight into the future for clients and serve as a blueprint for advisors. The hosts also tackle the topic of inflation and its impact on financial planning, sharing insights into the current economic landscape and the implications for investors.

Financial Planning Corner: Comprehensive Financial Planning for Long-term Success
The episode kicks off with an in-depth exploration of the concept of financial planning. Tony, the host, sets the stage by emphasizing the crucial role of a comprehensive financial plan in providing clients with a crystal ball vision into their financial future. He stresses the importance of integrating various elements—such as retirement decisions, tax strategies, and potential scenarios like rising inflation—into the financial plan. The hosts emphasize that financial planning goes beyond mere budgeting and focuses on “what if” scenarios to ensure long-term financial stability and success.

Inflation: Predicting and Navigating the Impact on the Economy
The podcast hosts engage in a thought-provoking discussion about the current state of inflation. They raise valid concerns about the impact of rising inflation on the economy. Luke particularly highlights the influence of investments in AI and technological advancements on inflation. Additionally, the hosts discuss the implications of an increase in the money supply and how it could contribute to inflation. They also anticipate the challenges of managing inflation by incorporating varied inflation rates into financial planning to ensure clients’ financial well-being.

Debt Addiction and Its Impact on Economic Stability:
Delving into the societal impact of debt addiction, the hosts provide insights into how individuals' comfort with debt and delayed repercussions could impact the larger economy. They emphasize the addiction-like behavior associated with accumulating debt and how it influences people’s spending habits and perceptions of financial risk. Tony and Luke explain the potential ramifications of excessive debt and its implications for overall economic stability.

Stock Market Sentiment: CFOs’ Optimism and the Role of The Federal Reserve
The podcast provides a compelling analysis of the stock market sentiment, focusing on the bullish stance of Chief Financial Officers (CFOs) toward the stock market and their skepticism regarding the Federal Reserve’s target inflation rate. The hosts dissect the impacts of bullish investor sentiment, especially in the context of evolving economic conditions and the potential influence on future Federal Reserve policies. This segment provides valuable perspectives on how market sentiments and policy decisions can impact investor behavior and economic trends.

The Intersection of Economic Factors: Showcasing Interconnectedness
Finally, the hosts beautifully illustrate the interconnectedness of various economic factors. They touch on the interplay between inflation, interest rates, employment metrics, and broader economic conditions. With an emphasis on the importance of understanding these complex relationships, the podcast highlights how each factor contributes to a broader economic narrative.

Transcript

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Hello and welcome to this week's episode of the Capitalist Investor. As always, you have me, diamond Hands d. We got the whole crew together again. Tony the tiger. Cool hands, Luke. What's going on, guys? How we doing? What's up? I think Tony and I are both tired. I don't know. I don't know why Tony's tired, but I got 2 hours of sleep. I just can't sleep. I don't know what it is. I barely made it through yesterday,

so I fell asleep at like 09: 0:22

00 last night. So I'm actually feeling good. Just rub it in, jealous man. So we are changing the structure up, I think, of the show. Want to kind of go through that quickly? Yeah. I want to start creating more of an idea behind financial planning and financial planning topics ranging from financial plans, inflation, building a portfolio. We have probably the next four months built out. So every week we'll come with a different topic, and I'm going to call it more of like, the financial planning corner of the show. And we'll kick off with that. And then we'll talk about maybe one of the top one or two hot topics that are going on in just general investing like we usually do. But it'll be chiseled down to the top one or two topics. But we'll always kick off with the financial plan. So with that being said, the first financial planning corner topic, the key elements of a financial plan, a comprehensive financial plan. So at the end of the day, I feel that strategic wealth Partners is a financial planning firm, because if we don't have a plan, the recommendations for the portfolio, the recommendations for retirement, retirement goals, spending, it's all guesswork, right? I always tell people that a financial plan is twofold. First of all, for the client, it's a crystal ball. It's a crystal ball for you to look into the future and really put together what you have saved, what you spend, how you live your life. It allows you to figure out, will you have enough money to last you your entire life? A crystal ball into the future. For me and the other planners like Derek and Luke, it's the blueprint. It's the blueprint for the recommendations and how to make what your retirement goals, how to make them happen from the plan. We're going to get retirement decisions. When's the right time to retire? When do you start Social Security? Tax strategies? If tax laws change, how does that change your plan? If you have a pension or a lump sum, which one do you take long term care? Can you self insure or do you need help with some type of long term care policy. If your plan is successful, the old saying, you can't take it with you rings true. So if you have a successful plan, can you spend more in retirement? I think it's important to go over what actually a plan is, though, like the actual metrics, you're going to get what you take away from the financial plan. So I know I came into the industry, and I know a lot of people I talk to think of financial plan as essentially us putting pen to paper and saying, hey, here's your budget for the foreseeable future. Here's what you can do, what you can't do. This is kind of like what's going on from a financial planning perspective. Stick to this and you're good for the next 20 or 30 years. That's what most people think a financial plan is. And the fact of the matter is, it's not that, because we always talk about how planning is not an event, it's a process, right. It's all always changing because things change all the time. But it's not just pen to paper showing you what you can spend, what you can't spend. It's really about showing you those what if. I know that's kind of the topics for today, too, is the what if scenarios. What if inflation runs hot? How's that going to impact your situation? What if you retire earlier? What if you spend more in retirement? How is this ultimately going to impact your chance of success? That's what we care about is the chance success that you don't run out of money age 90 or 95. Exactly. I think most people, when they think of financial plans, are exactly what, Luke, just, hey, like, am I going to be okay? We put in a couple pieces of information, and it's either a thumbs up or a thumbs down on retirement. When you're doing a comprehensive financial plan, however, it should be giving you essentially bullet points on, here is what we need to do to make your retirement better, and here is the dollar amounts that we can expect to realize from it in the future. Because when people are out there looking, they're talking to advisors, they're trying to figure out their own situation. They're getting bombarded with a whole bunch of messages. And most of those messages are investments. Right? You're doing it wrong because you need this investment, or you're doing it wrong because you need this annuity. And just putting financial products in place doesn't necessarily build your financial plan to be maximized. And I think that's what we really want to talk about, but also make sure that you're protected as well. Most people, the main function of a good financial plan is to give them that peace of mind, that everything that they're doing is working towards that common goal. Yeah, go ahead. Here's the problem, though, with what you're kind of saying is, as planners, I see a lot of people, I think, making mistakes in this industry nowadays with using only history as a gauge for the future. And this goes along with the whole investment returns kind of calculation or philosophy about how we need to keep in mind with all the damage we've done for the past, all the printing of stimulus, all the trillions of dollars we printed, this debt cycle we're in, that we talk about all the time on this podcast. How is that going to impact future returns going forward? And I think a lot of financial planners always say, oh, the market's going to return seven or 8% every single year. Oh, you just got to look to history and if you do this, do this, do that, you're going to be okay for the future for the next 30, 40 years? Well, the past ten years certainly probably are not going to be like the next ten years. And I'd say the past 30, 40 years are definitely not going to be like the next 30 or 40 years. Right. So a good financial planner is going to take into account philosophies about the future and factor that into your financial. So what you're really saying is that inside the planning software, the only variable are the investments because they go up and down, because we can dial in what I call the constants, your budget, your Social Security, your income before you retire, whatever you have going on in your life, the biggest number in the whole planet needs to be the most consistent, is your budget. But the investments are the things that drive the returns. The return of the plan are the results of the plan because it's the biggest variable. You can't just put a 7% rate of return in your thing and not have any variance because we know the market goes up 20% and then it goes down 30%. Right. There's these huge swings sometimes. And what Luke is really alluding to is that the last ten years, 20 years, 30 years, the average rate of return of the market is, I don't know, maybe, let's just call it 10% roughly. Right. Do we really feel that 10% is realistic on a going forward basis, too? So what we're trying to say is that at least on our planning software, in our planning team, we try to taper those expectations and provide lower rates of return. And it's a form of a stress test in the plan. We're stressing the plan in assuming we're going to get lower rates of return. Now, if we get higher rates of return, which we will absolutely try to do, it's only going to make your plan better. But I want to not give us pie in the sky kind of returns. And then we don't realize that in the next ten or 1520 years of your retirement, your plan blows up. That's what we're really saying. For example, I had a great case example last week, or, I'm sorry, yesterday, had a client come in, Brian and beth. Brian and Beth started with us about a year ago, and Beth just was, just started retirement. Literally, like the day we started working was the day that she retired. Brian was more semi retired and things like that. And we sat down yesterday and man, were they tan, right? And I'm like, where have you guys been? And they're like, I went to know for a month, and I'm like, wow, that's awesome. How'd you like it? They're like, we loved it. We want to do more of it. So that immediately perked my ears because I know that when we built their plan and after conversations, they're like, we want to do know. We had it planned for like one or two times a year. We want to go at least four times a year. So now that is a bigger expense outlay. And they're nervous. Well, maybe not nervous, but they really want to know, Tony, can we do this and get away with where it's like, okay, that's what we're going to do. We're going to rebuild your plan, and we're going to see how many vacations they can get away with. And then we talked in more detail, like, yeah, we want to do this for at least the next ten years, and then maybe taper it down. So having a plan, having a vision, understanding that vision from the client is so important so that we can model it inside of the planning software. Like you said, engineer. You're the engineer kind of here, right? So you like to financially engineer those answers for you, because that's all planning is, is giving you the answers and peace of mind, making you able to sleep at night better, knowing the possibilities of your scenario. Yes. And then I also like just asking the financial planning software what ifs. That's the perfect what if I spent more money on vacations? Can I do that? And then simultaneously I had the investment team there as well. And with the investment team there, we started thinking of investment strategies that are going to make this plan work, because what they're currently doing isn't going to hurt them, but they have an idea of not touching the principal. So what does that mean? I got to figure out ways to increase the income of the portfolio to generate the money to make these expenses happen or see if we can make it happen. Yeah, I have a good recent example of that one, too. When I first met these clients, their portfolios were okay, but I would say they were extremely conservative. There was a lot of cash in there and they had saved a really good amount for retirement. So basically, they kind of felt they could be more conservative with the assets that they had accumulated. However, their spending was basically what they were making. So when you project that forward with kind of a lower rate of return in the plan, their plan actually didn't work very well. So we needed to basically get that return up without increasing the standard deviation. So when you can pinpoint and dial in the actual investment strategies into the financial plan versus just putting a flat rate of return, 6% or historical rates of return, or even higher, you're going to get much more dialed into reality exactly what you can do. And that's where that peace of mind comes in. Again, that's ultimately what people are looking for, knowing that they're going to be okay. And sometimes some of the things that people think in the back of their mind sometimes aren't correct. Sometimes they are, but sometimes they aren't. That's what the plan does in black and white. It shows you where we need to go and how this needs to look. Yes. All right. So, I mean, anything else you guys want to add on the plan? I think we gave a good broad base of what it does. And again, it all starts with providing the vision for the client and providing the roadmap for the advisor for the recommendations. But, man, it's my job. It's our job, our planning team's job to really dial in the nuances of the investments return, making sure the budget is right. The next topic we're going to talk about inflation. We've been having internal discussions on how do we model inflation when the last ten plus years behind us have been, maybe the ten or 20 years behind us have been really low single digits, either between zero and 2%. And now we're getting hot inflation of between three and four now. So how do we do that inside the plan, and to give you some indication is that we have always been using 3% for inflation. And we're going to continue to use that because we do feel it will normalize. But if that's a what if, like if I have a client, they're saying I'm really worried about inflation, I think it's going to be 5% for a long period of time, then we build a scenario like that. Here's what you need to do. If inflation is 5%, right. With that being said, transition into some of the hot topics going on right now. And what CPI came out yesterday. Yeah, it was just a little hot. It wasn't anything too crazy, but it wasn't a great number. It wasn't a horrible number, but I think it came in 0.1% above estimates. What was the exact number? 3.35 or 3.23.23.2.1 was expected. So we're still in the low threes. We're not down to the 2% Federal Reserve target. Right. I'm going to say the same thing that I've been talking about. I think that one of the things that the Federal Reserve has no idea about is the amount of money and billions of dollars that companies are investing in this technology AI revolution that we always talk about, right? So if you have a bunch of companies, corporations pouring billions of dollars into R D and implementation of technology AI, like the Wendy's of the world, implementing robots to serve people, whatever you want know, example you want to use, that's inflationary at the beginning, it's deflationary in the end because technology is deflationary in the end. But at the beginning, when you're investing billions of dollars, that gets spread out throughout the economy, that's inflationary. So I think that's one factor that could actually, you can continue to see an uptick in inflation because of that. I saw something. I think inflation is going to be high for a while. And here's one of the other reasons, is that since 2000, the US has printed 80% of all the US dollars in circulation. And in 2020 there were $4 trillion in circulation. Today there's $19 trillion again, more dollars. Chasing few goods equals inflation, right. We are talking about almost between 300 and 400% jump in money that is available to people. That's why credit cards are going up and maybe no one cares because as long as you have a job and you can pay your debt, does debt matter? But it's expensive. We talked about a show or two ago that with the Biden administration coming in and chopping late fees from thirty two dollars to eight dollars are we going to have more late fees?$24 savings is going to do a. Lot, but what that's really going to do is that those companies need to make that money up somewhere and they're going to jack up our interest rates. So people who are accumulating debt are going to pay more on that debt. That sounds inflationary. Chasing your tax. Can we hit on that real quick? Chopping late fees from 32 to, like, was it eight? Yeah. Anybody in middle class America just thinks that's stupid. You're literally going tailoring to the lower of the low class. But I had the statistic last week and I'll try and do it off of memory. But this affects 25% of the debt paying population or something. It's 25% or 30%. Is anyone getting excited, though, over saving $24? It's going to save people $200 a year. And to the Biden administration, that's important. I don't know. I don't know. I agree with you, but, yeah, I would rather pay a lower interest rate. I'd rather pay a lower interest rate and have lower inflation. Me too, but that's not going to happen. Those credit card companies are going to make up their money somewhere else and it's going to be through the interest that they charge you. I don't know how you can't. There's a ying and a yang, there's a pool. There's this push and pull, and it's going to equal out. I don't know. But I was baffled that this affects 25% to 30% of the population is this is going to affect them. That means a third of the working population are late on their credit card payments. This goes to another thing. Point I had, too, is the addiction to debt. I always talk about addiction to debt. One of my good mentors said to me that debt's like a drug. The more debt you take, the more you want, the more you're okay with. I think we're at a point where you have to factor in the comfortability with debt. People haven't lost their homes yet. People haven't lost their cars. If they're late on their credit cards, they're like, oh, I'm just getting late. Cool. I get charged a $20 late fee, $30 late fee,$8 late fee. Like, cool. That's all that happens. Well, let me keep on racking up debt because they're not coming from my house, they're not coming from my car. Let's just keep this debt brigade going. They're comfortable now because they're seeing that there's not really any big repercussions yet until they absolutely cannot, they max out everything and then they can't pay their mortgage or they can't go get another loan to pay off their old debt. Basically, people are doing the same thing the government's doing. They're printing new money, new debt to pay off old debt, and that's only sustainable for a certain period of time. I agree. All right. There was one other thing that I saw. So this is going to be a new note for you guys because I saw it as I was walking in here. But top CFOs are bullish on the Dow and dovish on the Fed as they've been in a long time. So I thought that was pretty interesting because what that really means is that soft landing. Yeah. Quote unquote soft landing. But the one thing that they said is that one of the consistent views is that they don't see inflation getting to 2% at any time, which is the Fed's kind of benchmark for lowering interest rates. I don't understand how we're going to lower interest rates in June or July is kind of the time frame. What is it, 70% chance that they do that? The heck is going to happen in June or July for them to do that? Why would they? I like what they're doing. They're letting, the only way they're letting inflation to 2% or the job market breaks. Right. I don't see any of those happening. Which it has, though. There was an uptick. Unemployment. That's one thing. That was last Friday I believe came out. Unemployment was at 3.7%. Now it's at 3.9. So you did see a 20 basis point jump. That's because they just have to revise the numbers because the numbers that they. Put out are fake. True. Well, you said it, not me. Sorry. They're inflated too. Yeah. Sorry. Yeah. This is meant to be entertainment, this show, right. We make a lot of predictions. They're not always right, but we've been saying for a long time about inflation how there's no way that it's going to start to go down. And we've been right for a long time and I'm still on that train. I don't know when the next rate cut is coming, but it doesn't seem like it's one good CPI reading away. I would be surprised if we got one this year. I don't know what the forecast is saying now. I know we started off with six and they were supposed to happen in March. Was it going to be the first one? Let me also say this. There's a philosophical term associated with this, but when you talk about something enough, it comes true. The more we talk about inflation staying high, the more likely it is to stay high, because a small business owner down the street, or any business owner down the street that knows that everyone's being impacted by inflation will continue to keep rising the prices because they think everyone else is doing it, too. That's why it's going to make inflation coming down even harder. Well, that was, we're all talking about inflation. That was the part of the state of the union. President Biden's talking about shrinkflation. They're putting less chips in your chip bag. Crazy. I mean, it is true. Well, also, you talk about people spending money. You're like, everyone else is spending money. Why don't I spend money? That also causes inflation as well. Again, when you start comparing yourself to others, it starts influencing your own decisions, which also goes into what we were just talking about, the macro factors, inflation, interest rates and economy. Yeah, inflation will be here because we printed so much money. There's so much money available out there. Believe it or not, I think I heard a statistic today that there's$6 trillion in money markets. 5 trillion of it is mine. All right, guys. All right. Good show. If you like what we're thinking about for the financial planning corner, let us know if there's a topic you'd like us to talk about. We have the next several weeks and months mapped out, but if there's a financial topic that you'd like us to talk about, we can accommodate and shuffle things around. So let us know, but take us home. D all right, well, hey, thanks for listening this week. If you got any questions, comments, show ideas, hit us up at info@swpconnect.com and we'll talk to you next week. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.