Financial Planning
- Comprehensive Financial Planning
What is Financial Planning?
Financial planning is the process that helps you take control of your financial situation, identify your future goals and objectives, and develop strategies to help you take better control of your financial assets and manage your money more successfully. Planning starts with the recognition that you have goals or concerns about your financial situation. Your plan should be specifically designed to help your achieve your objectives and take control of your financial situation.
There are as many financial solutions as there are financial goals or challenges. How do you select from the immense variety of financial products? How do you balance your immediate financial and lifestyle needs with your long-term financial needs? How do you provide for your children’s education, take care of your aging parents and still secure your own retirement? How do you choose from stocks, bonds, mutual funds, money funds, certificates and other investments? How do you decide how much to hold in tax exempt, tax deferred or taxable investments? What do you know about protection plans and estate planning tools, such as trusts?
The financial planning process will answer many of these questions. Not only will you have a better understanding of your personal financial situation but also you will learn about the advantages and disadvantages of planning solutions; their risks and opportunities and which are best suited to help you achieve your financial goals.
Unlike financial product sales, financial planning concentrates first in identifying your particular financial needs rather than promoting specific products or investments. Financial planning is a process, not an isolated event like buying life insurance or investing in a mutual fund.
Once your financial goals are defined, you will work with your advisor to put in place solutions that are tailored to your situation. You will meet regularly with your advisor to review your plan and make revisions as needed to help you track your progress towards meeting your financial goals.
The Financial Board of Standards recommends a comprehensive financial planning process. A sound financial plan is an integrated analysis of your financial situation and covers six key areas:
Your financial plan will include an analysis of your situation and needs as well as recommendations on how to achieve your goals. It will also explore alternatives in varying depths, depending on your personal goals and concerns.
- Financial Position
- Protection Planning
- Investment Planning
- Tax Planning
- Retirement Planning
- Estate Planning
Financial Position
A sound financial plan begins with a thorough understanding of your financial position and identifies strengths and weaknesses in your current situation. This involves asking key questions covering three major areas.
- What do you hope to accomplish?
- What are your goals for yourself and your family?
- A first (or second) home?
- College education for your children?
- Controlling or reducing taxes?
- Assuring you a comfortable retirement?
- Where do you stand today?
- What is your net worth after subtracting all your liabilities from all your assets?
- Exactly how much of this is readily available in case of emergency?
- How much discretionary income do you have after meeting fixed expenses?
- How much can you comfortably afford to save for your goals?
- How can you reach your goals?
- How much time do you have to achieve them?
- How much money will you need?
Once your current situation is understood and your financial and lifestyle goals are identified, the next steps are forward looking. The analysis will look at your financial needs throughout your financial life, identify strategies to meet your particular objectives, and provide options to overcome financial roadblocks you may encounter.
Protection planning
Protecting yourself against the unexpected is a vital element in financial planning. This means having adequate protection to insulate your life plan from financial loss. As situations change over time, your protection needs also change. This is why it is important to regularly review your needs.
While protection needs and goals vary, there are certain basics that should be covered. You should cover your own and your family’s health and financial security. This includes medical, property, disability, and life and long-term care protection needs.
The protection planning part of your plan can help you discover ways to manage risk more efficiently and economically. Adequate protection is fundamental to sound financial planning. It is essential to help you avoid destroying the assets you build for retirement and other goals.
Investment planning
A seemingly endless variety of choices are available to you as you try to select the right investments for your current and future needs. Thorough financial planning is vital to making wise decisions. Proper asset diversification can build a portfolio that will help you meet your goals, such as vacation, college education, or a comfortable retirement.
Before you invest, your goals should be reviewed, the amount of risk you are willing to assume and the timeframe within which you hope to achieve your objectives.
First you may have short-term needs. Everyone should have cushion (reserve) to fall back on when an opportunity or unexpected emergency arises. By definition your reserve should be easily convertible to cash when you need it. It also should be money you can definitely count on that is not tied up in investments whose values fluctuate. The amount of your reserve depends on the size of your family, your income, your lifestyle, and your own assessment of the possible contingencies you may have to face.
After your cash reserve needs are taken care of, you may want to set up a program to help build assets for other goals. These assets usually fall into two categories: fixed assets and equity assets.
Fixed assets are funds invested at fixed rates of return, usually for a specified period of time. Examples include bonds (corporate, government) and certificates of deposit.
Equity assets are investments whose market values and rates of return can go up or down. Unlike fixed asset investments, which are usually bought to produce income, equity assets are bought for growth or for growth and income. Real estate, for instance, is an equity asset; stocks are also equity assets. They may pay varying dividends, or none at all, and the value of a share will fluctuate depending on the market.
Equity asset investments can be used for either long or short-term goals but it is important to understand the risk involved. I can help you evaluate all the choices and implement a strategic investment plan.
Income Tax Planning
Wise tax planning can be a powerful element in protecting and building your assets. Financial planning will help identify the impact of taxes on your current financial situation, as well as look at the tax implications for future investments.
One way to help reduce the bite taxes take is through tax-exempt investments. Virtually all of these are free from federal income tax. Many are also free from state and local taxes when purchased by residents of those areas.
The income paid on investments in certain tax-deferred products such as deferred annuities and universal life insurance is not immediately taxable. But unlike tax-exempt income, tax deferment simply postpones the payment of taxes until receipt of this income at a later date – preferably when you are in a lower tax bracket. Earnings withdrawn prior to age 59 ½ may be subject to tax penalties.
Of course, a major way for individuals with earned income to defer payments of taxes is through employer sponsored retirement plans or Individual Retirement Accounts (IRA). For certain investors, IRA contributions are tax-deductible. For other taxpayers, after tax contributions to a Roth IRA grow tax-free. It is important that you understand the advantages and disadvantages of different strategies so that you can decide which course of actions is best for you.
Retirement Planning
For many people, a comfortable retirement is a primary concern. If you haven’t already started saving for retirement, it may be time to begin – no matter what your age. If you have started, it will be helpful to review what you have achieved so far, and how far you have to go to reach your desired level of financial resources. If you have already retired, you will want to look at allocating your resources so that they provide an adequate income for your entire retirement.
An initial step is to determine how much money you will need to enjoy the retirement lifestyle you desire. Then you can consider the sources that will provide income for you, such as a private pension plan or Social Security. The financial planning process will tell you if you are on track towards financial independence and at what age retirement becomes economically feasible.
Beyond employer sponsored retirement plans, a basic individual retirement tool is the Individual Retirement Account or IRA. More recently, there has been much interest in the Roth IRA. Annuities may offer another form of saving money for retirement in certain circumstances.
A job change often affects retirement plans. Those who may be leaving a company may face many confusing choices about their retirement benefits. Financial planning helps you evaluate your choices and decide how best to invest the lump sum distribution received from your employer’s plan. For most people, their retirement plan is the largest amount of money they will ever handle. It is crucial to choose the right investment vehicle for your distribution.
The decisions you make in saving for retirement today can have a major impact on the type of lifestyle you enjoy in your retirement. Your financial plan will address your specific concerns in this area and help you develop the strategies to meet your goals.
Effective retirement planning requires answers to these five questions:
- How long to I have to invest? Your time horizon is an important consideration when creating any investment plan. The longer your have to invest, the easier it may be to achieve your goals.
- How much income will I need? Quantifying y our goals is a critical part of planning. Many experts recommend a target of 75% to 100% of your current income. But is that what’s right for you? Only by evaluating your own particular situation through a financial plan will you know what percent of current income you should provide for in retirement.
- How much money will I need? You’ll need to amass a certain amount of capital to earn enough income for the rest of your life. What’s more, that income will probably need to grow over time because inflation will continue to erode your purchasing power throughout your retirement.
- How much do I need to invest? Social Security and possibly a pension may provide some retirement income. You personal retirement investments, and possibly some part time work, will have to provide the rest.
- How should I invest? Your goals and your time frame before retirement will determine the best strategy for you. While relatively aggressive investments may be advisable, you may be able to reduce risk through mutual funds, which offer the benefit of a long-term investment perspective combined with broad diversification.
Estate Planning
Contrary to popular belief, proper estate planning is not just for the wealthy. You may have a potential estate large enough to require the special information that a financial plan can provide.
It is important for you to know what will be available to your heirs when your estate is settled. At the same time, you want to reduce estate transfer costs and be sure that enough money is available to cover all obligations of the estate.
Estate planning is a highly specialized area that can be covered through the financial planning approach and the services of your legal advisor.
Effective estate planning includes the following:
- Writing a will. This lets you name an executor to manage your affairs and specify how you want your assets distributed. Keep in mind that wills are subject to probate, a legal process that is a matter of public record.
- Owning assets jointly. Holding assets as “joint tenants with rights of survivorship’ ensures that the assets are passed tax-free to the surviving owner. Jointly owned assets are not required to pass through probate. Caution is advised for non-spouse joint tenants.
- Gifting assets. This is a good way to reduce the size of an estate during a lifetime and avoid estate taxes. However, the amount you can give tax-free to family and friends is subject to annual limits.
- Transferring assets to beneficiaries. Using insurance policies and beneficiary designations on retirement plans can help you control who receives these parts of your estate.
- Creating a revocable trust. This strategy is not for everyone but it ranks among the most comprehensive planning strategies, enabling you to maintain complete control during your lifetime, reduce inheritance taxes and avoid probate.
Summary
A successful financial plan is balanced, pinpoints your particular needs and goals, and devises an integrated strategy to meet them all over a period of time. It works toward growth and security in both the short and long run, while also attempting to balance risks.
There are four areas essential to balance. You can help achieve balance by:
- Having cash, reserves to meet immediate needs
- Adequate protection to provide money in the event of an unforeseen emergency
- Fixed assets to provide additional income at predictable rates of growth
- Equity assets to help you achieve an attractive rate of growth as you accumulate money for the future
Each of these areas is considered in developing your financial plan and will be integrated to help you achieve your financial goals.
|
