Would you go on a vacation without planning it? Of course not, so why would you head for retirement without planning for it? Unfortunately, that’s exactly what many people do. In early 2012, a study sponsored by the Consumer Federation of America and the Certified Financial Planner Board of Standards found that:
- 34% of Americans say they can retire at age 65, down from 50% in 1997
- 48% of Americans with college-bound children are saving money for their education, compared to 56% 15 years ago
- About 50% have fallen behind on their retirement savings, compared to 38% in 1997
Not surprisingly, the study also found that less than one-third of all Americans – just 31% – have a financial road map. That’s the same number as in 1997.
What Is a Financial Road Map?
Planning for your future is about more than just planning for your retirement. Done properly, it’s a blueprint for using all of your financial resources and earning power to meet your financial needs, now and in the future, in the most efficient way possible.
What do we mean by the efficient use of money? We mean making sure that you cover all of your needs to the greatest extent possible, given how much money you have and, if there’s any left over, maximizing your potential wealth while staying within your comfort zone for risk-taking. A financial road map determines whether you are spending too much in one area of life to the neglect of another.
4 Steps in a Financial Road Map
- The first step in making a financial road map is taking a snapshot of who you are. It’s like a household census: how many in your immediate family and how many outside your immediate family do you want to provide for in some way, like parents or grandchildren.
- The second step is to take a financial inventory: how much total income does your household bring in every year, what are your expenses including taxes, what is the value of all your assets, how much debt do you have, and what is your net worth (assets minus liabilities). Knowing your net worth is important, because it’s the foundation for financing your entire life and a sign of how long you could cover your basic needs and lifestyle if you were never to receive another dollar of income.
- The third step is to define all of your financial goals. For most people, this means:
- Creating a “rainy day” fund to pay for expenses in case you become too ill to work or lose your job
- Obtaining life insurance to cover your spouse’s and children’s needs in case you pass away prematurely
- Securing disability insurance coverage in case you can’t work for an extended period of time because of an illness or injury
- Paying for your children’s educations
- Financing your retirement
- Minimizing your taxes
- Providing long-term care for you and/or you spouse
- Providing an inheritance for your heirs or a legacy to a charitable cause or institution
4. The fourth step is to develop a savings and investment plan to meet all of those goals. This is a multistep process. First, it’s important to determine what kind of investor you are: are you comfortable with taking risk to obtain a high rate of return, or are you more conservative and willing to accept a lower rate of return for greater safety? How you score on a test of your “investor personality” will help determine an asset allocation strategy that balances risk and return while meeting your objectives. The final step is to select the types of accounts you’ll need, fund them, and select the investments.
Completing a financial road map can make all the difference between having the future you want or settling for one you can afford. It’s never too early to start planning.
If you haven’t completed a plan for your financial future or feel like it’s time to review the one you prepared yours ago, please call.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.