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Financial Plan: Your Financial Road Map
A 2009 survey by the Certified Financial Planner Board of
Standards found that only slightly more than one-third (36%) of Americans have a
formal financial plan.
What Is a Financial Plan?
A financial plan is a document that serves as a blueprint
for addressing your money needs in the most efficient way possible for the rest
of your life. It may include:
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A list of your household income and expenses - your
personal income statement
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An inventory of your assets and debts - a household
balance sheet - from which you calculate your net worth (assets minus
liabilities)
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Your combined effective income tax rate, including
federal, state, and local taxes
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An evaluation of your needs for life, disability, and
long-term-care insurance
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Your vulnerability to estate taxes and recommendations
on steps to minimize them
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Specific recommendations for satisfying such long-range
goals as paying for college for your children and providing an income for
your retirement, including an amount to save and invest every year, and an
investment strategy, based on assumptions about future rates of inflation
and expected returns from various types of investments
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A tax-efficient strategy for leaving assets to the
people or charities of your choice |
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Goals Versus Dreams
Every part of a financial plan is important, but the
single most important component is your goals. It's a good bet that a number of
the 64% of Americans without a financial plan don't actually have goals, because
they may not understand the difference between a dream and a goal.
A dream is expressed something like this, "I want to
retire early and have a comfortable lifestyle that includes playing golf and
travelling." A goal sounds more like this, "I want to retire when I'm
60, be able to support a lifestyle that costs $125,000 a year in today's
dollars, and maintain that lifestyle at least until the end of my current life
expectancy."
While the dream sounds nice, the problem is that if you
don't get specific, how would you even know whether you achieved it? How early
is early? How comfortable is comfortable? And what do you have to do between now
and then to fulfill the dream?
Goals are measurable targets that lend themselves to a
series of precise action steps that make it possible to accomplish them.
Defining a goal means you set specific numbers for:
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An amount: How
much money you're going to need to spend every year for that purpose.
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When you'll need it:
The first year you're going to have to come up with the money.
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How long you'll need it:
Is it just four years for each of your children to attend college or for the
rest of your life? If the latter, how many years is that likely to be? |
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A Living Document
Creating a sound financial plan takes a lot of time and
effort. But the truth is that even after it's done, it's never really finished.
That's because it's only as good as it faithfully documents your current
situation: your age, health, assets, liabilities, how many dependents you have,
and all those things that can and do change over time.
Back to topics.
 Achieving
Your Resolutions
How often have you drawn up an ambitious list of new
year's resolutions, only to find you've given up on them after a few weeks?
Don't let that happen to you in 2012. If you want to make strides toward
achieving your financial goals, determine why your resolutions have failed in
the past and find ways to overcome those obstacles.
We make resolutions because we really want to change some
aspect of our lives. However, the reason we have to make resolutions is because
it is difficult to get these things accomplished. Thus, if you want to achieve
your resolutions, follow these tips:
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Put your resolutions in writing.
Doing so will go a long way in helping you achieve those resolutions.
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Make your resolutions specific and
achievable. Rather
than making vague or very broad resolutions, set smaller goals you know you
can reach. Once you achieve these smaller goals, you may find it easier to
pursue more substantial goals.
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Don't expect perfection.
Changing any behavior is tough, and you should
expect that you might slip along the way. Don't use that as an excuse to
abandon your goals. Shake it off and keep pursuing your goals. |
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If you're looking to shape up your finances, consider
these tips:
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Spend less than you earn.
The amount of money left over for saving is a
direct result of your lifestyle. Since you will typically want to continue
the same lifestyle after retirement, your lifestyle decisions will impact
you now and in the future. To get a grip on your spending, take time to
analyze your expenses and set a budget. Try to reduce nonessential
expenditures or find ways to spend less money on the same things.
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Save the money before you see it.
If you have to find money every month to save, you'll probably find there
isn't much left after paying all the bills. Typically, a better strategy is
to set up an automatic savings program where money is automatically deducted
from your bank account every month and directly deposited in an investment
account. Another good alternative is to sign up for your company's 401(k)
plan. (Remember that an automatic investing program, such as dollar cost
averaging, does not assure a profit or protect against a loss in declining
markets. Since such a strategy involves periodic investment, consider your
financial ability and willingness to continue purchases through periods of
low price levels.)
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Don't let debt sabotage your goals.
If a significant portion of your income is going
to pay interest on loans, you'll have less available for saving. Strive to
eliminate all debt except your mortgage. Pay cash for all purchases so you
don't incur additional debt. Pay down your existing debts by using
additional funds to pay off the debt with the highest interest rate. Once
that debt is paid in full, start paying down the debt with the next highest
interest rate, continuing until all your debt is paid in full.
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Invest, don't just save.
The ultimate value of your investment portfolio is
a function of two factors - how much you save and how much you earn on those
savings. Become comfortable with various investment alternatives, so you'll
feel more comfortable investing in alternatives that offer potentially
higher rates of return. Even small differences in your long-term rate of
return can significantly impact the ultimate size of your savings. |
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Back to topics.
 Your
401(k) after Changing Jobs
Long gone are the days when most employees worked for the
same employer their entire careers. In fact, the U.S. Bureau of Labor Statistics
reported recently that people born between 1957 and 1964 held an average of
nearly 11 different jobs between the ages of 18 and 42.
That means millions of Americans have participated in more
than one 401(k) or other type of qualified retirement plan. A good number of
them maintain those 401(k) plans with their former employers. The alternative is
to transfer accounts to your current employer's plan or to roll the funds over
to an IRA.
While there's no law limiting the number of tax-advantaged
accounts you can maintain, there are practical considerations in favor of
rolling over your plan assets into a single account:
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It's harder to execute an asset allocation strategy
across multiple accounts. A key to getting the most out of your investments
is a defined asset allocation strategy that matches your need for
performance and your tolerance for risk. You achieve this by diversifying
your portfolio across the basic asset classes and a number of sub-classes.
When your portfolio is spread out over more than two accounts, it's more
difficult to monitor your asset allocation.
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Plans can change providers. Plan sponsors
(employers) often change 401(k) plan providers as they try to maximize
service and minimize administrative expenses. This usually means a change in
the plan's fund choices that you need to evaluate. Also, if you don't make
your choices in a timely manner, the new provider will typically
automatically place your funds in a low-risk alternative.
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Rebalancing is more difficult. Rebalancing involves
restoring your portfolio to its planned asset allocation proportions by
selling off some of the investments that are performing well and reinvesting
the proceeds in your underperforming investments. The more investments you
have in more places, the more transactions you have to execute.
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With more than one account, it's harder to assess the
performance. With fewer investments in fewer places, it's easier to
monitor their performance and identify how they're doing compared to the
markets.
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You may reduce your expenses. Fees charged by 401(k)
plan providers directly affect the returns your portfolio generates. If
former employers' plans charge more than your new one, you may be able to
boost your portfolio return simply by consolidating your funds into one
plan. |
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There may also be very good reasons to maintain more than
one retirement account. For example, rollover IRAs generally offer more
investment choices and control than most 401(k) plans.
Back to topics.
 Estate
Planning for Singles
If you're single and think that estate planning is a topic
only relevant to married couples, think again. Whether you've never been married
or recently became a single person again, there are a number of estate planning
steps you should consider.
It's in part a matter of being thoughtful of the loved
ones you'll leave behind after your death. You don't want them to have to go
through the hassle of probate court, for instance, or to fight among themselves
about what they think your wishes really were.
But proper estate planning is also about ensuring that you
protect the assets you've worked hard to accumulate throughout your life - that
you're not unnecessarily giving assets away to Uncle Sam and that they're
distributed in a way that you would like, not by a probate court judge.
Consider Possible Beneficiaries
Under most state laws, your estate will be distributed
according to the rules of the state in which you reside if you don't have a will
or other estate planning documents. If you have life insurance, you've already
had to name beneficiaries of the policy's death benefit. But what about other
assets?
Do you have any children, grown or otherwise?
Grandchildren, other relatives, close friends, or business associates you want
to benefit from what you leave behind? How about a nonspouse partner? Millions
of people today are in committed relationships without the benefit of marriage,
and partners in these relationships have no inheritance rights unless you
specify so in some kind of legal documentation. Or, perhaps, there are charities
that you'd like to receive some or all of your estate.
Create or Amend Your Will
Without a will stipulating to whom your assets should pass
upon your death, your assets will likely go through probate court, where delays
can be extensive and interested parties can make legal claims on your estate -
claims that may or may not coincide with your current wishes. If you're a single
parent without a will, a court will appoint a guardian for your children - not
necessarily the person you think is best suited to raise them.
In a will, you'll name a guardian for minor children as
well as an executor of your estate - a person who is entrusted to notify people
of your death, carry out your final wishes, close your accounts, and pay final
bills. If you already have a will but are recently divorced or widowed, you need
to review your will and make changes based on your new situation.
Designate Beneficiaries for Your IRAs
IRAs and other tax-deferred retirement accounts don't pass
through a will, so you'll need to designate a person, trust, or organization to
receive those assets. Without named beneficiaries, a probate court judge could
distribute the assets to the same people you've named in your will.
Create a Living Will and Name Powers of
Attorney
Living wills and powers of attorney are legal documents
that make it possible for your wishes to be carried out in the event that you
are temporarily or permanently disabled. What kind of medical treatment and life
care do you want to receive? For how long and where do you want to receive that
care?
A living will and a health power of attorney ensure that
you'll be cared for by a person you've chosen in advance (hopefully, one who has
your best interests in mind). To ensure that financial matters are also taken
care of (bills paid and contracts signed on your behalf, for example), you'll
need to name a durable power of attorney as well.
Back to topics.
 Save
as Much as You Can
Are you contributing as much as you can to retirement
plans? If you're not funding the maximum amount possible, you could be missing
out on a way to significantly increase your retirement funds. The limits are:
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Individual retirement accounts
(IRAs) -
The maximum contribution is $5,000 in 2011 and 2012. In addition,
individuals age 50 and older can make additional catch-up contributions of
$1,000 in 2011 and 2012. These limits apply to traditional and Roth IRAs.
Annually, the lesser of the maximum IRA contribution or earned income can be
contributed. You can make a deductible contribution to a traditional IRA if
you and your spouse aren't participants in a company-sponsored pension plan.
Active participants can make deductible contributions as long as their
income is less than prescribed limits. All taxpayers, regardless of income
or pension plan participation, can make nondeductible contributions to
traditional IRAs. Roth IRA contributions, while not tax deductible, can be
made by single taxpayers with adjusted gross income (AGI) less than $107,000
in 2011 and $110,000 in 2012(contributions are phased out for AGI between
$107,000 and $122,000 in 2011 and $110,000 and $125,000 in 2012) and by
married taxpayers filing jointly with AGI less than $169,000 in 2011 and
$173,000 in 2012 (contributions are phased out with AGI between $169,000 and
$179,000 in 2011 and $173,000 and $183,000 n 2012). Starting in 2010, all
taxpayers, regardless of income level, can convert a traditional IRA to a
Roth IRA, providing a means for taxpayers over the annual contribution
limits to contribute to a Roth IRA.
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401(k) plans
- The maximum contribution to a 401(k) plans is
$16,500 in 2011 an $17,000 in 2012. The catch-up contribution for
individuals age 50 and older is $5,500 in 2011 and 2012. |
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Every year, analyze your contributions to ensure you are
funding as much as you can.
Back to topics.
Copyright © 2012 Integrated
Concepts. Some articles in this newsletter were prepared by Integrated Concepts,
a separate, nonaffiliated business entity. This newsletter intends to offer
factual and up-to-date information on the subjects discussed, but should not be
regarded as a complete analysis of these subjects. The appropriate professional
advisers should be consulted before implementing any options presented. No party
assumes liability for any loss or damage resulting from errors or omissions or
reliance on or use of this material.
FR2011-0915-0065
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