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5 mistakes you can avoid if you work with a financial planning firm to plan your sabbatical

You’re planning a sabbatical, how amazing! And you’ve decided to work with a financial planner to help you figure out the financial details of the adventure ahead. Of course, we support that! 

As you search for and work with a financial planner, here are a handful of mistakes you can avoid so your sabbatical planning experience really is about planning for YOUR dream.

1. Assuming a question is too basic to ask

If you’re embarrassed to ask a question because you think it’s too basic, that you should already know the answer, that you can just Google it when you get home…ASK! Sometimes it’s one of the most basic questions that can make everything else make a little more sense, and often the “basic” question comes with a more complicated answer that can be clarified for your specific situation.

For example, what’s the difference between a Traditional IRA and a Roth IRA? The big difference is in the way the funds in the account get taxed. Other differences include different eligibility thresholds and differences in penalties if funds are withdrawn before retirement.

And these can be important distinctions when planning for a sabbatical. Instead of looking at four different Google search results and the different tables to figure out how this applies to you, ask your financial planner.

Research that will take you an hour is something we can tell you in a few minutes.

Another question you may not think of asking is how your financial planner is compensated. Yes, you can (and should) ask that! This is not a question that has a single answer. And there are benefits to each type of compensation, depending on the type of relationship you want to have with a financial planner.

We are a fee-only firm, which means we only receive payment directly from clients. We do not receive commissions or referral compensation. Other firms do. Your financial planner should be able to clearly explain how they will be paid for the work they do for you.

2. Trusting underlying assumptions without understanding what they’re based on

Working with a financial planner, you will most likely build a financial plan together. It’s essentially a projection of your financial health over time. 

The inputs to the financial plan should be very similar across different financial planners. This includes your income, savings, spending, and goals.

But here’s where one financial planner’s financial plan may look different than another:

Assumptions on market returns for different types of investments, general inflation, education inflation, healthcare inflation – These are determined by the financial planner and entered in the software settings. A higher assumption around market returns and lower assumptions around inflation will return very different projection results and can impact the discussion around priorities, decisions, and next steps.

Assumptions behind the goals you discuss – For example, if you want to stop working before age 65, does the financial plan assume you will have to pay for health insurance? In most cases, this will be a significant expense before Medicare kicks in. Is it built into the plan for you? Or maybe more near-term, does the financial plan assume you will continue making your same income during your sabbatical? This is a specific scenario that isn’t common in financial planning, so take a moment to review some of the details behind the picture your financial planner shows you.

In general, it’s good education to know what’s going on behind the scenes. And it can be fun to change some of the assumptions so you can see the impact that has on the overall plan. 

3. Letting traditional retirement planning and rules of thumb guide your financial decisions and actions

Traditional retirement planning involves tracking income, expenses, savings, investments, and major goals over time and then projecting the percentage success based on different market return scenarios. 

 These typically involve:

  • Income that grows at a reasonably steady rate – if you plan to take a sabbatical, this may not be true!
  • A goal to buy a house, start a family,  send kids to college – are these your goals too? Will you be doing one or more of these things at the same time as your sabbatical?
  • A goal to retire in a specific timeframe – many of our clients use their sabbatical to find work that they love so the date they stop working is more flexible than if they were in a job they hated. How firm is your retirement date?
  • Overall investment risk working toward goals over the full timeframe – see above to read more about assumptions behind financial plans, but all to say that sabbatical planning may involve different account strategies than traditional retirement strategies.

4. Leaving all follow up items for your financial planner to do

Your financial planner can help you do research, select from various options, and implement certain action items if you agree to let them do so. But remember, this is YOUR plan. And the more you do, the more you’ll understand about your overall financial situation, and how to make decisions and take action in the future.

For example, only you can log in to your accounts and pull statements if your financial planner isn’t managing the account for you. Log in, get that statement, look at it, and share it with your financial planner! And if you have discussed updating your investments in your 401(k), log in and get that done! 

Also, we often see things like insurance and estate planning procrastinated. They don’t feel urgent, but in the case something happens it’s so good to have these things in place. If your financial planner has recommended that you consider disability insurance or that you meet with an estate planning attorney to draft your will (your state already has a will drafted for you, and you may not like it), take the steps to move these things forward. If you decide to go a different route, at least you will have done it intentionally.

5. Constraining your search for a financial planner to your local region

Traditional financial planning was very geography-based. There are a number of firms whose business model is built specifically around neighborhoods and serving the people who live there. The clients don’t have much more in common than that. 

But times have changed. Zoom (or some other video conference software) is more of a norm, and financial planners have started getting more specific in the types of planning (and clients) they specialize in. When you’re on sabbatical, it’s likely you won’t be in the same geography anyway!

To expand your search beyond your local region, here are a couple of networks of advisors who also do fee-only financial planning: XYPN and NAPFA 

We are so excited that you’re planning a sabbatical and that you’re looking to work with a financial planner to make it happen. Keep these tips in mind as you move forward and you’ll be on the right track to have a positive experience.

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This blog post is provided for educational, general information, and illustration purposes only. Opinions expressed herein are solely those of Middleton & Company, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.
Nothing contained in the material constitutes financial or tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Middleton & Company, and all rights are reserved.