How to Reach Your Financial Planning Goals
Accumulating wealth is a long-term process, one that can allow you to do the things that you want in life and provide a nest egg for your retirement. In recent years wealth accumulation has taken a hit as the economy works through a huge market correction. The worst appears behind us, giving savvy Americans the opportunity to save money and accumulate wealth ahead of the next market surge.
To achieve your financial planning goals, you need to set objectives for where you want to be a certain number of years out. You’ll need to review your current assets, the resources you have to accumulate wealth, determine your future financial needs and develop a plan to reach your goals. Most busy people use the services of a certified financial planner to help them manage their portfolios. If you hire one, then you can expect him or her to assist you with the following:
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1. Debt Management
Before you being a wealth accumulation regimen, your financial planner will review your debt. Not all debt is the same and your adviser will assign your debt to one of two categories: good debt and bad debt.
Good debt represents an asset, such as your home. A mortgage can provide a tax deduction and your home’s value is likely to increase over time. Your adviser may encourage you to refinance, especially if you haven’t done so in several years. Your lower cost represents money that has been freed up to pay down debt or to invest.
Bad debt represents personal loans, credit cards and car loans. Your financial planner may advise you to pay off or reduce some debt before you begin to invest.
2. Cash on Hand
Your financial planner will advise you to set aside some money for emergencies. The amount you’ll be setting aside will depend largely on your personal needs.
Michelle Lerner, writing for Bankrate.com, notes that the old recommendation of having three to six months of money to cover expenses no longer applies. With Americans losing jobs and staying out of work longer, you may be advised to have at least nine months or a full year of savings on hand before you begin to invest. That money should be placed in an emergency account and only touched when you are facing a true emergency.
3. Investment Portfolio
You’ll know your financial planner’s worth when he or she begins to shape your personal investment portfolio. Your adviser would determine a sensible asset allocation for you and base that on your personality as well as your tolerance for risk. As with any investment, the riskier it is, the more likely you will lose money. If you’re risk adverse, your financial planner will recommend more secured investments.
Expect that your financial adviser will recommend a mix of bonds, stocks, mutual funds and other investment vehicles. He or she will help you weigh your investments with perhaps 40 percent in bonds, 25 percent in stocks, 25 percent in mutual funds and the remaining 10 percent in other investments. The percentages will be weighed based on your risk tolerance and desire for growth.
4. Real Estate
We mentioned in the first step good debt and for most Americans their home qualifies. An adviser will discuss options with you including refinancing your home, paying off your mortgage or even taking out equity and investing it elsewhere.
Beyond your first home, you may have a personal desire to own real estate. That desire may be based on wanting a vacation home or perhaps a retirement home. Your adviser will go over your options and help you craft a strategy for getting that home. This might involve investing in bonds and stocks for several years and then selling same to buy your home.
5. Life Insurance
Every investor needs to have life insurance especially those with young children or a dependent spouse. Your adviser will discuss two types of life insurance: whole life and term.
According to SmartMoney, whole life insurance combines a term policy with an investment component. You’ll build a cash value that can be borrowed against. Whole life is available in traditional, universal and variable arrangements.
With term insurance, you’ll take out a policy ranging in length from one to 30 years. This option is typically favored by individuals with children, to provide a nest egg to them in the event of their death. Typically, you’ll be encouraged to obtain a policy equal to 10 times the amount of your annually salary. Therefore, if you make $500,000 annually, then you’ll need a $5 million term life insurance policy.
6. Retirement Planning
Every financial planner will discuss with you your retirement options. The investments you make now will have a huge impact on how you will live once you stop working.
By the time you’re ready to quit working, your financial portfolio will likely be far more conservative with mostly low-risk investments remaining. Your adviser will discuss with you the amount of money you need to live on in your retirement years to maintain your lifestyle. Whereas you might have made $100,000 annually in your peak years, you may find that having access to $60,000 per year is sufficient to maintain your lifestyle. By then, your homes should be paid off and your expenses related to work removed.
Your adviser will help determine how many years you need to have funds available for your retirement. For example, if you retire at 65 and can expect to live an additional 25 years, then your investments must be sufficient to cover your anticipated lifespan with some margin for error built in. The $60,000 will also need to be adjusted for inflation and will likely need to yield far greater results toward the end of your life.
Your financial planner can help you in other areas of your life too. Estate planning is important, to ensure that your loved ones are provided for or a favorite charity is remembered and that your estate tax burden is reduced. Your adviser can help you develop a plan of wealth transfer before your death, one where certain assets are entrusted to your heirs. Finally, your financial planner will periodically rebalance your portfolio, adjusting it to reflect current market conditions and to synch with your risk tolerance.
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