Free On-Line Financial Plan

A financial plan consists of gathering current data and running calculations to see if your plan has a good chance of achieving your goals and objectives. We asked Mike Kavanagh, CFP® of the Radio Show Money Matters on WSB Radio  to put together this on-line financial plan with his comments and insights.

STEP ONE – Your GOP (and I don’t mean the Republican Party)

Your GOP – goals objectives and priorities. What are they? Be specific and write them down.

GOAL #1 – Your first goal should be to start early saving for retirement. You want to have enough money so you can not have to work – and have enough money coming in so you can live without fear or concern. Be specific in your goal here. Example:

• I’d like to quit my current job at 65. I’d like to work part time as a consultant on my own terms for as long as possible. I plan on two big trips each year to places I have not seen. I want to be more active in supporting my favorite local charity.

Goals are best when they are specific and written down.

GOAL #2 – Mortgage free by 63. Having a home that is paid for when you retire means a huge monthly expense you won’t have to face. It will be bad enough facing home repairs, insurance and property taxes without a monthly mortgage on top of that.

GOAL #3 – and beyond are goals that you would like to achieve but are not as vital as goals #1 and #2. Example – saving enough money to pay for four years of college for a child. Saving for college is secondary to saving for retirement. There are scholarships, loans and grants for college. There are no scholarships, loans or grants for retirement.

STEP TWO – Calculate your budget. Where is your money going each month?

Use the budget calculator I have selected to get a handle on where your money is going and what your spending habits are.

I suggest you create two new bills in your budget.

The first bill is what I will label “ME BILL #1. At your job, sign up for your retirement plan (401k, 403b, SEP, etc.) and put 10% of your salary into that plan through automatic deduction.

The second bill is ‘RAINY DAY BILL”. Set up an automatic deduction program to have money put into a cash savings account for emergencies. You can do this through programs such as:

• Treasury direct automatic deduction into U.S. Savings Bonds
• TIAA-CREF automatic deduction into TIAA-CREF money Market fund (see section six of application form for $100 a month program)
• On-line bank automatic deductions into high yield money market funds such as programs at Emigrant Direct.

STEP THREE – Calculate your net worth

A simple step – how much you do you have in assets versus what you owe. Use the Bank Rate Monitor calculator. The number should be positive and every few years should be growing.

STEP FOUR – Debt and Credit planning

Normally not a part of the traditional financial planning process, but this has become an area of great concern in recent years, especially with young consumers. Here we link you to a calculator, benchmark numbers and a service recommended by consumer advocates Clark Howard and Mike Kavanagh if you need help.

STEP FIVE – Insurance

If you are married and do not have adequate life insurance you are setting up a potential disaster for your spouse. This financial plan demands that you calculate life insurance needs and then helps you buy affordable insurance yourself. It is unthinkable and borders on immoral in my view that you don’t take on this responsibility.

Don’t ask for guidance on investing and mutual funds if you don’t do step five.

Step five also demands that you have the following in place in addition to life insurance:

• Health insurance – if you work and you can afford it, you don’t go without it.
• Disability insurance – very inexpensive in a group plan with an employer – don’t overlook this as “not necessary.” It is cheap and it is vital.
• Renter’s or homeowner’s insurance.
• Auto insurance

There are other types of insurance worth having – umbrella liability, long term care and more. We provide links to read more about these issues.

STEP SIX – Estate planning

Step five and six should be done together. At the very least your estate documents should include the following:

• Will
• Living Will
• Power of Attorney Health Care with HIPPA waiver
• Power of Attorney for Financial Matters

This is not a legal website and we do not dispense legal advice.  Get a good estate attorney to go over your estate issues. Yes, we know they cost money. Pay up.

Consumer advocates like Clark Howard say if your estate issues are simple, consider doing these documents yourself.  One great source for do it yourself document preparation are the kits offered by NOLO Press

As part of step six, also run a calculation to see if your estate may have to end up paying a federal estate tax.

STEP SEVEN – Retirement Planning

Run a calculation to see if you are saving enough for your retirement. We suggest using the following assumptions:

Growth funds/stocks - 9% annual average return long term (10 years +)

Money in cash accounts – 5% annual return average

Income in retirement – 6.5% average annual yield

Social security – assume if you are over 50 you will get most or all of what is projected. Under 50, assume you will get 50% or less – perhaps even zero.

Using our assumptions, see how your plan turns out.

Now, go back and use assumptions of your own. Perhaps you want to calculate yield on income investments in retirement at 4%. See what happens.

STEP EIGHT – Investment Planning

This step comes late because it is easy, once the other steps are in place. While it may seem confusing, you need to know the following.

Over 15 years you can’t find a single stock market mutual fund that has beaten the benchmark of the stock market known as the S&P 500 index. If you have a good low expense index fund in your 401k, put your money into that and nothing else if you have over 10 years before retiring. You heard me right – one fund and you are done. If you have other index funds, you can add those as well, but the notion that money can be managed long term to consistently beat the markets is absurd. It hasn’t happened before, so why does anyone think it will happen going forward? Never buy a fund because it did well last year, or the past three years or even the past five years. If you buy a fund managed by a human being, make sure you know who the person is, what they are all about, how they think and act and what they stand for. Don’t buy a fund, buy the market index or buy a specific manager you really like.

Put cash away for a rainy day. Have money equal to six months of bills in a savings account, savings bonds, CD’s and the like.

As you get closer to retirement, begin pulling away from stock funds to avoid a huge shock of a market downturn that comes close to your retirement date. Many people stayed in the bull market of the 1990’s and saw half of their money evaporate in the downturn that followed – forcing many to go back to work and retire much later than they hoped. A good plan for a person in a 401k is to be 100% stocks in an index fund and 9 years from retirement to pull 10% out of the index fund and put the money into a short term bond fund or money market fund for safety. This way on the day that person retires, 100% is in the money market fund. They can then transfer that cash into IRA’s for retirement income.

When you retire, look at income generating investments such as dividend stocks, bond funds, real estate funds, etc. See www.incomeplanner.com for more information on income investments. Also see income investments at www.yourwealth.com for professional management of income portfolios for retirees.

Own a home if it makes sense. Have a plan to be “mortgage free by 63!”.

If you have money in a stock index fund, money in the bank and you own a home, you have stocks, cash and real estate. You’ll get bonds later on when you retire. If you want to diversify into bonds when you are young, consider guaranteed insured U.S. Savings I-series bonds that respond to inflation. If you do that, then you will have stocks, bonds, cash and real estate. You won’t have commodities, gold, etc., but you don’t have to have them. Don’t let the pushers of these be like a drug pusher --- luring you to believe what they sell is good for you. There is no evidence that failing to have a commodity fund, gold fund or whatever hurts an ordinary investor.

If someone tries to sell you an investment, run the other way.

Repeat – if someone tries to sell you an investment – run!!!!!

Annuities – the TSA/403b program at your job, fixed rate guaranteed annuities and immediate income guaranteed annuities are about the only acceptable annuity plans you want to consider – ever. Variable annuities touting guarantees of principal and even 7% guaranteed returns are frauds and scams. Legal yes, but still scams. Run!!!

STEP NINE – College Planning

If you are fortunate after doing all the eight steps above and still have extra money to put aside for college education of a child, then look at tax-free 529 plans as a great way to save money. The top plans in the country along with a full discussion of these can be found at Clark Howard’s web site – www.clarkhoward.com

STEP TEN – Real Estate Planning

Mortgage free by 63! Use a calculator to see how much you need to add to your monthly payment to achieve this goal.

SPECIAL NEEDS PLANNING - Planning for a disabled child, an elderly relative or a sibling with special mental or physical issues requires the careful work of a good attorney to set up special needs trusts, a good social worker to help you look into public and private programs and an objective financial planner to help guide you through the pros and cons of various investments for trust accounts. In this regard, we suggest starting out with some guidance of a fee-only planner who is a member of NAPFA who can help coordinate a team of people to help you. To get the name of a good NAPFA fee-only advisor in your area, go to the web site www.napfa.org and click where it says “Find An Advisor”

WHEN YOU HAVE COMPLETED YOUR PLAN

Summarize your findings and look where you have any weaknesses.

If you have questions about any of these steps, write to the fee-only financial team at Capital Investment Advisors -- radio@yourwealth.com

If you are in the Atlanta area, call to make an appointment to come see one of the advisors at Capital Investment Advisors in Sandy Springs . The number is 404-531-0018. There is no charge for an initial free one hour consultation.

Now, go on to the checklist for your financial plan.