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Craig Allen: Five Essentials to a Powerful Financial Plan

There's no time like the present to begin planning for your future

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

If you talk to 100 financial planners, you will likely get 100 different answers for how to structure your financial plan. There are certain essential elements that every financial plan should contain, however, and specific things everyone should consider when starting the process of developing a personal financial plan. Here are some essentials that everyone should consider when undertaking the financial planning process.

Gather Your Information First!

Many people jump into the financial planning process prematurely, before they have taken the time to gather all relevant information. This often results in a financial plan that is missing vital elements and details that will make it much harder for the person to achieve long-term financial goals. Take the time to gather all relevant financial, health and business (if applicable) information before you start the process of developing your financial plan. Create a file and make copies of all current financial statements, loan paperwork, bills, credit card balances, insurance policies, trusts, lists of all assets, etc.

Make a list with each family member, including any extended family members who may affect your financial plan along with a description of their current health condition, any significant medical history, expected future health issues, etc. Also, make a list of all financial goals — short-, medium- and long-term objectives for you and your family. Think about the lifestyle you want to lead when you retire and what it will take financially to secure that lifestyle. Also, think about future major asset purchases, such as new cars, vacation homes, boats, planes, etc. Consider future educational needs for children and grandchildren. (Educational expenses are expected to rise, on average, by 7 percent per year, so factor this annual increase into your projections.)

Think about parents and grandparents of you and your spouse, and what their future living and medical needs may be, and if their assets will be sufficient to cover their expenses, or if you will be required to help. Take some time with this step and think through the various scenarios — in-home care, facilities with various stages of care and assistance, the various price levels for each type of care, etc.

Finally, think about your legacy. What do you want to happen to your assets when you pass on? Do you have charitable intent? Do you want to provide money for future generations? Will your family be provided for should something happen to you prematurely? Will your current insurance be sufficient, should you pass on prematurely? Run the various possible scenarios out in time and evaluate your assets in relation to the expected needs of your family to see if your insurance coverage is sufficient.

Get Organized!

After you have gathered all necessary and relevant information, you can organize that information into categories, in relation to the key sections of your financial plan. While every person will have a somewhat unique financial plan, based on his or her specific situation, there are several major areas of a financial plan that virtually everyone will want to include.

Outline Your Plan’s Structure

A simple structure for a typical financial plan could include three sections — retirement planning, estate planning and emergency planning. A fourth section should be included if you have children who will attend college, trade schools, art schools, etc. These costs can be substantial, and are growing at more than twice the rate of inflation currently, and could increase even more quickly in the future.

Retirement Planning

The retirement planning section should contain an analysis of current and expected income, investments, assets, expected retirement age (for both spouses if married and if both work), projected income and spending needs during retirement, life expectancy for both spouses, expected major purchases during retirement, etc. These projections must include medical and other health-related expenses as you age, including plans for making a transition to assisted living and eventually full-care facilities.

Your income needs must take into account the impact of inflation on the buying power of your income — a dollar 25 years from now will not buy what a dollar will buy today! While inflation averages about 3 percent per year, it certainly fluctuates, so you will want to think about your time until retirement and what you think inflation will do during the time between now and then.

This section will contain projections for the expected growth of your investment. You will need to make a lot of important assumptions about investment performance, economic growth, inflation, your expected earnings over time, etc. Try to be realistic. I prefer to use three scenarios — pessimistic, realistic and optimistic — to give my clients a range of possibilities.

The estate planning section should include all legacy-related issues — charitable intent, future generations, etc. If assets are projected to be significant, where estate tax planning is necessary, consideration should be given to consulting with an estate attorney to establish one or more trusts, and to have a wealth transfer plan developed to maximize the assets available for fulfilling your wishes after you pass on. This process is complicated by the fact that no one knows what estate tax laws will be in effect from year to year. Attorneys who specialize in estate planning can help design estate plans that incorporate all that we know at present about future estate tax laws, and that provide flexibility so the plan can be altered if needed.

The emergency planning section should contain your current insurance information along with an analysis of your family’s/loved ones’ needs, should something happen to you prematurely. This section should also contain an analysis of the potential costs to you and your family/loved ones should you become incapacitated and are unable to work and need significant medical care. Long-term care insurance should be considered. Working with an insurance agent on this section can be very beneficial.

Consideration should also be given to other emergencies, such as the loss of a job, legal liability that may arise through business dealings or accidents, fire, earthquake, floods, etc., that may destroy assets. You should think through your personal and business situation and those of your family members to identify any possible risks and then design a plan to mitigate these risks, either though insurance, or by setting aside sufficient assets to cover all liability or losses.

If you will provide for the educational costs of children or grandchildren, you will need to include a section for educational planning in your financial plan. As stated previously, educational expenses are expected to grow at 7 percent per year, on average. Depending on what type of education the child wants, and the type of school, costs vary widely. You can get an idea of the overall costs for a given institution by visiting the school’s website. Each school will have an admissions section that details the costs of attendance. It is a good idea to factor in housing costs, if the child will live on or off campus. Off-campus costs are certainly much higher, and typically involve additional costs, such as transportation, fuel, higher food costs, etc. Private schools are obviously much more expensive that public, in-state schools. The number of years until the child starts his or her college, trade school, etc., provides the planning period for the first year’s projected expense. Planning should include the entire period the child is expected to attend school, with appropriate growth rates assigned to invested assets during the projection period.

While I’ve just skimmed the surface in this article, and have presented a very simple three-section financial plan, this information can assist the average person in creating a reasonably detailed financial plan. This process can also provide a foundation for a professional Certified Financial Planner (CFP) to use as the foundation of a more detailed plan.

While I would certainly recommend hiring a professional whenever possible, it is far better to undertake this process to develop a basic financial plan on your own, rather than not having one, because you do not wish to pay a professional to create a plan for you. Everyone should have a financial plan!

Once you have a plan, it needs to be updated periodically, as things change in your life. Divorce, health issues, children going to college, retirement, death ... all of these things affect a person’s financial plan and changes will need to be incorporated into the plan to keep it current. As I am sure is obvious from this article, this process involves many different variables, scenarios and considerations, with all of these influenced by the needs, wants and means of the individual. While everyone should certainly have a financial plan, I highly recommend working with a professional who can help you develop a customized financial plan that addresses all of your specific needs and wants, and includes contingencies for the unexpected. Don’t put this off! If you don’t have an up-to-date financial plan, start the process today. Don’t be like the person who waits until they get robbed to buy an alarm system; take positive action now!

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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