Category: Education

Things a Financial Plan Should Tell You – and Things It Won't

A financial plan is like a road map.   A map will tell you where you are, where you want to go, and the route to take to get to your destination.  But the map is not the territory and sometimes the roads on the map are potholed or washed out, so alternate routes are required.  And sometimes you can’t get there at all.

So what should a financial plan tell you?

1.  What is my net worth?  A plan that doesn’t tell you where you are is no plan at all.  It’s the starting point where all plans begin.

2. What is my goal?  If you don’t know where you’re going, any road will take you.  Goals are usually described as the income it will take to provide you with the lifestyle you desire.

3. How much money will I need to retire?  Keep in mind that there are a lot of assumptions built into this number such as your other income sources, your estimated spending during retirement, the withdrawal rate that will not deplete your money during your lifetime,  the rate of return you can expect on your money during retirement, and many others.

4. What rate of return will I need to meet my retirement asset goal?  As you put money aside for retirement there are two components that influence how much you will retire with: the amount you put aside and the growth of those assets.   You have more control over the amount you save than the rate of growth you can expect.   That is one reason risk control is vital.  You don’t want investment decisions to negatively affect your savings rate.

5. What is a safe withdrawal rate?  There are academic studies that use historical data that provides some guidance.  But the rate your money grows at the beginning of your retirement has a disproportionate effect on on the amount of money in your retirement account.

6.  What is the probability that I will run out of money during retirement?     Some plans use Monte Carlo simulation to give you a probability of your running out of money, but beware of assumptions built into these simulations that may give you a false sense of security.

Worst College Majors for Your Career

If you are in college, going to college or plan to pay for your children to go to college this article in Kiplinger’s is must reading.  Given the spiraling cost of college and the fact that many are graduating with thousands or even hundreds of thousands in college loans to pay off, it behooves people who don’t have a trust fund to fall back on to consider what the chances are of gainful employment with these degrees.

10. English
9. Sociology
8. Drama and Theater Arts
7. Liberal Arts
6. Studio Arts
5. Graphic Design
4. Philosophy and Religious Studies
3. Film and Photography
2. Fine Arts
1. Anthropology

Five key benefits of independent Registered Investment Advisors

More education from Charles Schwab on RIAs.

1) Get advice based on what’s best for you.
Whether it’s your retirement planning, tax situation, estate planning or assets at multiple places, it’s fundamentally important that your advisor truly understand you, your goals and your situation. Many independent registered investment advisors (RIAs) are in a position to do that and pride themselves on strong personal interaction with their clients and dedication to their needs. They believe that their independence is key to offering investment advice based on what’s best for their clients.

2) Understand exactly what you’re paying for.
Independent RIAs typically charge a fee based on a percentage of total assets managed. This fee structure may have advantages. It’s simple and easy to understand, helping to avoid surprises. It also gives your advisor an incentive to grow your assets—when you succeed, your advisor succeeds.

3) Get advice for your complex needs.
Many independent RIAs provide services that address a variety of complex investment needs that often arise when you accumulate significant wealth, such as assisting you with the sale of a business, complicated tax situations, trusts and intergenerational issues. Some advisors are specialists in certain investment strategies. Others can assist you with comprehensive services, such as estate planning or borrowing. Given the rich diversity of specialization throughout the industry, no matter how complex your individual needs, you will likely find an independent RIA who can provide advice that’s right for you.

4) Enjoy a different kind of relationship.
The goal of an RIA is to help find solutions that are closely aligned with client needs and objectives, and many independent RIAs enjoy a deep, personal relationship with their clients. This often takes regular, ongoing interactions. And because many independent RIAs are entrepreneurial business owners, the buck stops with them, so to speak, and they frequently have a strong sense of personal accountability to their clients.

5) Know where your money is held.
RIAs typically use institutional custodians—generally large brokerage firms or banks—to hold and safeguard their clients’ stocks, mutual funds and other assets.  These custodians also provide important infrastructure services such as executing trades and preparing monthly brokerage statements for clients. This helps an RIA focus on understanding your needs and providing the best advice possible.

Smart Ways to Manage a Windfall

Whether you have received an inheritance or won the lottery, before you splurge, take time to consider all the financial angles and come up with a solid plan.  There is a reason most lottery winners wind up broke.  Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.  The bigger the jackpot, the greater the chances that you will be the victim of bad decisions.

Many people view a windfall as “found money” and treat it differently than money they’ve earned.  They’re much more likely to use it in a way they’d regret.

Win or inherit enough and banks will lend you enough money to put you in debt.  Yacht brokers will call, as will Realtors will call who have your dream home on the market.

Some financial planners advise waiting  until you give yourself time to come up with a solid plan for how you’ll use the money.   If your inheritance includes an IRA, there are special rules that you will want to consult with financial planners on.

The biggest mistake people make with a windfall is not figuring out how to make the money last.  If the money is big enough, assemble a financial team that includes a financial planner, a CPA (certified public accountant) and perhaps a lawyer.  If you are unaccustomed to handling large amounts of money, a financial planner is the most important part of the team.  You will want to do a search of planners who have a CFP™ (Certified Financial Planner) in their title, and someone with whom you are comfortable discussing your personal financial needs and goals.

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