Um, is Your Financial Plan Missing Something?
Here Are 3 Things I See People Miss the Most With Their DIY Financial Plans
Through the work I’ve been doing as a financial advisor, I’ve realized that often the hardest part of DIYing your finances is you don’t know what you don’t know.
You can have a good handle on 80-90% of your financial situation, from investments to tax planning to cash flow, but that last 10-20% of your financial plan can create some dangerous or costly gaps.
In the spirit of spreading awareness, I want to highlight three things I see people miss the most when it comes to their DIY financial plans:
#1: No, Or Very Low, Umbrella Coverage
I’ve been on a kick lately reviewing clients’ property and casualty insurance (home, auto, and umbrella).
Hands down, without fail, Umbrella coverage is the most significant gap that I see. Either, clients simply don’t have coverage at all, OR they are significantly underinsured relative to their total net worth.
For those unfamiliar, the best way to think about Umbrella coverage is to focus on the name: Umbrella.
Umbrella coverage goes above and beyond all the other coverages you have, adding another layer of liability protection (think $1M+ of protection if someone sues you.)
But don’t worry, even though the protection is sold in $1M+ increments, it is amazingly cheap (think ~$200-300 per year for every million in coverage) (Note: this can vary widely depending on your unique situation, where you live, whether you have teenager drivers on other policies, etc.)
But do you really need it? Yes. You really do.
For better or worse, the US is a very litigious country. People sue other people when stuff happens. Exact coverage amounts vary by person, but the general rule of thumb is to have coverage equal to your net worth, rounded up to the next million. So, if your net worth is $500K, round up, and get a million in coverage.
If you want to get really nerdy about it (which I typically do) you can adjust that calculation to coverage equal to your ‘claimable assets’ rounded to the next million.
All that means is that there are certain types of assets that are not claimable by creditors if you’re sued. For example, generally, your 401(k) or other employer-based retirement plan is protected under ERISA laws, shielded from civil lawsuits. But, for IRAs, that protection varies by state, so it is important to know what you are looking at, or simply go back to the broader 'net worth’ number. So, if you want to insure up to your claimable assets, simply take your net worth, minus your non-claimable (protected) assets, and then round up to the next million, and get coverage.
So, how do you buy it?
It’s easy, reach out to the company you have home and/or auto coverage with and ask them to give you a quote for the desired amount of Umbrella Coverage. (Remember Umbrella is sold in $1M increments.) One thing to consider is that if you are purchasing $5M+ of Umbrella coverage, you’re going to want to go with a high-net worth carrier instead of your typical Statefarm or Geico carriers. High net worth carriers get significantly better rates on higher coverage amounts.
Last thing I will say: Think about it like this…
Umbrella is the cheapest and most powerful type of protection you can buy.
#2: No, Or a Very Old, Estate Plan
Up next is the second biggest culprit I see: no, or a very old, estate plan.
Look, I get it. Creating an estate plan has to be one of the least fun things that you can do when it comes to your money. That’s because not only is it expensive, but it also forces you to sit there and imagine who you would want to have your stuff, make decisions on your behalf, or care for your kids (or pets) if you became incapacitated or died.
Literally no fun at all.
But, you’ve got to get it done. For those with kids especially, you’ve got to get this done. If not, and the worst case happens, it’s up to the court to decide who will raise your kids.
But, what if you don’t have kids? Do you need an estate plan?
Absolutely.
An estate plan also outlines who can make decisions on your behalf (medically and financially) if you are incapacitated.
Also, and maybe this is less important to people, but should at least be considered, it outlines where your stuff (money and personal property) goes when you pass.
Without it, again, it is up to the courts to decide who gets what when you pass. And, if there is money involved, this can lead to a situation where your family members are at odds with each other because they have different opinions on what you would have wanted. Also, if you have any pets, you can decide who will care for your pets if you are gone, and even include a financial stipend from your trust to compensate your pet’s guardian for that.
So, if you don’t have one, consider getting it done. And if you do have one, consider when it was last reviewed and updated.
Are the people listed still the people you want in key positions? If you’ve had any more kids, definitely update the estate plan to list them. If you had grandma and grandpa as the potential guardians for your kids, but they’re getting older, consider whether that still makes sense or not. Also, for those with adult children, it can make sense to add your adult children into key positions as well, potentially removing older peers that you had listed in those positions initially.
So, how do you get it done?
The traditional way is to find a local estate attorney in your area, bite the bullet, and pay $1 - 2k to get an estate plan. Alternatively, go online, and use one of the cheaper, DIY services like Trust and Will. That’s what my wife and I did and we were very happy with the outcome and got a full estate plan (wills, a revocable living trust, etc) for right around $600, and it probably took us 30 - 45 minutes to complete.
Either way has its pros and cons, but in the end, this is a critical part of any financial plan and must be done.
#3: Neglecting Tax Diversification in Investment Accounts
Last but not least, while many understand the importance of investing to grow their wealth over the long term, few consider the importance of balancing those investments across different account types.
The result I often see? A retiree with 90%+ of all their investments in tax-deferred accounts. In other words, they have almost no tax diversification across their accounts.
Why is this important?
Because tax diversification allows you the flexibility to choose the most tax-efficient strategy when withdrawing money in retirement. For example, if you’re in a high tax bracket one year, you can draw from a taxable or Roth account to avoid pushing yourself into an even higher bracket. Conversely, if your income is unusually low, it might make sense to pull more from a tax-deferred account to take advantage of the lower rates.
But, if everything is in a tax-deferred account, then all of your distributions are taxed as ordinary income at your highest marginal rate each year.
If you are a little fuzzy on the three different account types and how they are taxed, here’s a quick breakdown:
Tax-deferred accounts like 401(k)s and traditional IRAs allow you to save pre-tax dollars now, but withdrawals in retirement are taxed as ordinary income. While these accounts are great for reducing taxes today, relying too heavily on them can create a “tax bomb” later, as required minimum distributions (RMDs) kick in and increase your taxable income.
Tax-free accounts like Roth IRAs and Roth 401(k)s are funded with after-tax dollars, meaning you pay taxes upfront but enjoy tax-free withdrawals in retirement. These accounts provide a hedge against future tax increases and can be a valuable tool for managing your tax bracket in retirement.
Taxable accounts, such as brokerage accounts, don’t offer upfront tax breaks, but they do provide flexibility. You can access funds at any time without penalties, and qualified dividends and long-term capital gains are taxed at lower rates than ordinary income.
The perfect retirement mix will vary, but I like to see roughly a third in each account type. This gives you tremendous flexibility to create the perfect (tax-efficient) retirement paycheck when you start taking distributions.
So, what can you do about it?
To avoid this mistake, first, figure out where you are at now, and then aim to build a balance across account types throughout your working years.
For instance:
Contribute pre-tax to your employer’s 401(k) to get the full match, but consider shifting excess savings to a Roth IRA or taxable account.
Use Roth conversions strategically in years when your income is low.
Revisit your strategy as you approach retirement to ensure your savings are diversified not just by asset class but also by tax treatment.
By planning ahead, you’ll give yourself more control over your tax situation in retirement—and ensure you can adapt to whatever the future holds.
In the end, I think there are many in the FIRE or Slow FI community who are doing a phenomenal job DIYing their financial plan, but for those that are, maybe take a look at the three items listed here and get to work filling in any of the gaps you may have.
I hope this helps, and don’t hesitate to respond with any questions you have!