Financial Planning, Retirement Planning and Estate Planning; what do they all mean and what is the difference. The challenge to answering these questions is there is no universal definition. Everywhere you look, these terms are sometimes being interchanged to mean the same thing.
Financial Planning to me is the all-encompassing term. It refers to planning your financial affairs at any age. It might incorporate things like saving for retirement but also other facets of personal finance like cashflow, debt management, short term investing, tax savings strategies, pensions, etc.
Retirement Planning is more focused on accumulating assets to replace your working income. Retirement planning will occur before you retire, at the time you retire and while you are retired. Typically retirement planning is different at all three stages but the focus is on how much is enough and then switches to how do I replace the income when I stop working and how do I structure my investments accordingly. How do I minimize taxes?
Estate planning typically becomes a priority later in life. I think Tim Cestnick, author of Winning the Estate Planning Game said it best, “Estate planning is the process of structuring your affairs to preserve your wealth and transfer, in an orderly fashion, what's left at the time of your death to those you wish, whether they are family, friends, partners or your favorite charity.”
If you look at this definition, there are really 4 components to estate planning:
- Structure. There are certain legal documents that provide the structure of an estate like the Will, an Enduring Power of Attorney and the Personal Directive. There are also important tools in estate planning like trusts and life insurance.
- Preserve Wealth. Nobody likes to lose money. In estate planning keeping your estate from creditors, the government and expenses will ultimately contribute to wealth preservation.
- Distribute assets. If you have assets left over when you die, whom do you want to give it to? With a little planning you will have all the say. Without a will and a plan, we have seen families get torn apart because there was no proper distribution strategy. The more complicated your estate and the more heirs you have, the more important it is to have an estate plan.
- Personal Wishes. Estate planning is really about carrying out personal wishes. The only way to carry out personal wishes is to make them known to your executor and/or beneficiaries. This involves communication, which can be very difficult because of the difficulty in talking about money and death with close family. You wishes include what you want done with your assets, what you want done with your funeral and what you want done for a legacy.
What stage in life are you at? If you are older, chances are you will be thinking about estate planning. If you have assets that you are likely not going to use and pass on to your spouse or your kids, then you need to think about the four components of an estate plan and how they pertain to you. If you are the type of person who thinks it doesn't matter and whatever your heirs want is what you want, then ask them. If you asked your loved ones what they want, I bet they will tell you that they want your personal wishes carried out. In the end, it all comes back to you and your wishes.