About Financial Planning

Given the increasing interest in retirement, the possibility of reduction in Social Security benefits, the stock market's ups and downs, and increasing debt, more Americans are taking financial planning more seriously, and some are contemplating finding a financial planner to help them. A financial plan is a road map that can help you reach certain milestones in your life, milestones that will take money to achieve. Everyone should have a financial plan, and everyone's plan will be different because as goals, needs, expectations, and risk tolerances are different. Plans are critical as they answer the following questions:

• How do all my investments fit together as a whole;
• How much money will I need at certain points in my life for my different goals;
• How long do I have for my money to grow before retirement and how can I grow it consistently over a long term;
• How much will I need to live on once I stop working and where will that money come from?
• Am I going to get Social Security and/or a pension? How much will that be?
• How much of what I'll need to live on in retirement do I need to generate myself through my investments?

Many people wonder why they should spend money on a financial planner. Consider, you can not be an expert in all things. Most families are faced with many financial choices; do you really have the time or expertise to make the right choices? Do you know whether a variable annuity, 401(k), traditional IRA, Roth IRA, or a combination of these are the best way to fund your retirement; you don't want to find out, as you near your desired retirement age, that bad choices, made years earlier, will prevent you from retiring. Do you really know which 401(k) choices and/or college tuition programs are best for you? Many people's portfolios have been thrown together over time, buying this stock or that fund on a whim or hot tip; do your investments complement each other in terms of risk and diversification? If you're genuinely concerned about whether you're on the right financial track, or if your financial picture has recently changed, then a good financial planner can be worth the expense. Contrast the cost, maybe several hundred dollars now, with the potential gain of many thousands of dollars later; don't be penny-wise and pound-foolish. However, don't expect miracles, for financial planners can not guarantee your future financial results and should not promise instant riches. Their primary function is to help you achieve your financial goals.

People only have a finite amount of time to earn the money they need to see them through the rest of their life. A major fear, if not the major fear, of a majority of Americans is running out of money while in retirement. This can happen due to any number of reasons, including poor planning and unexpected expenses, such as health-related expenses. Imagine the problems and anxiety involved with suddenly realizing, well into retirement, that you do not have enough money and will have to find a new job. Alternatively, imagine that you are running out of money, but are unable to hold down a job due to different infirmities. Or imagine that you simply can't afford to retire, due to lack of savings. You can soon find yourself dependent on the good graces of others. Social Security will almost certainly be there in some form and will act as a safety net, but the size of the monthly check makes this program a thin reed to depend on. Social Security was never intended to be the major portion of anyone's income during retirement.

The keys to a good financial plan are realistic assumptions. Your financial future can look great in a plan that assumes that your assets consistently grow at 15% a year, you will only need your money for 15 or 20 years after retirement, or you can depend on withdrawing 10% or 15% of your money each year to live on. Unfortunately, if you are wrong in any of these assumptions, you may wind up running out of money in retirement, which, as noted above, is not a pleasant prospect. Thus, it is important to err on the side of being conservative, by overestimating the amount of money you'll need, underestimating the annual returns on your investments, and overestimating the amount of time that you'll need your money.

Your financial plan should not be a one-time event; it needs to be thought of as a work in progress. Hence, it should be monitored and updated on a regular basis. Unforeseen events in your life as well as changes in the financial markets can often render the best plan deficient at best and inoperable at worst.

To see my approach to financial planning, click here.

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