Table of Contents
What we want to learn about financial planning
- Cash Flow Tracking & Savings Techniques
- Insurance Planning
- College Savings Strategies
- Asset Allocation Techniques
- Retirement Savings Strategies
- Basic Estate Planning
- What to Look For in a Financial Planner
Cash Flow Tracking & Savings Techniques
Save First, Spend Second
- Prioritize your financial goals
- Calculate the monthly savings required
- Invest savings based on amount of time until goal date
Find Ways to Increase Savings
- Get a raise or bonus?
- Done paying down a debt?
- Capture a portion of increase in surplus cash flow –
part savings, part increase in lifestyle
Where to Save
Open a Vanguard/Fidelity/Schwab Investment Account
- Set up ACH link to checking account (overnight transfers)
- Begin monthly deposits from your checking account
Ultra Short Term Goals < 1 Year
- ING Savings Account
- DFA One-Year Fixed Income Fund
Short Term Goals > 1 Year
- Vanguard Short Term Bond Index Fund
•Vanguard Limited Term Tax Exempt Fund
Insurance Planning
Types of Insurance
Life Insurance
- Term, Variable Life, Universal Life, Whole Life
Disability Insurance
- Short and Long Term Disability
Long Term Care Insurance
- Home and Facility Care
Property and Casualty
- Home, Auto, Liability
Life insurance needs change over time
Term Insurance
•Covers needs for the least expense
- layer policies to cover needs over various time periods
Permanent Insurance
- More expensive
- Protects long term needs
Permanent Life insurance – Potential drawbacks
Permanent Life Insurance – As Savings Vehicle?
- Permanent Insurance will be pitched to you as a way to supplement your retirement income
-In order for this approach to work, you must over fund the
policy being purchased as much as possible
-Distributions are then “borrowed” out of the policy free of tax –
but not free of expenses
-Loans are paid back when the policy pays out the death benefit
- Insurance company sets the lowest premium you can pay (Term), the government sets the highest (MEC)
- Most insurance salesmen are not acting as fiduciaries, they are selling a product
What to Look Out For in Permanent life insurance
- Front loaded Premiums (higher in start years) -Feeds the Salesmen a higher commission, at your expense
- Premiums that are below the maximum allowable premium based on the policy you are looking for
-The same premium dollars in policies with larger death benefits
result in larger commisions, at your expense
- Unreasonable Rate of Return Illustrated
-Policies will fall apart if those returns are not met
- Rate of Return does not change during illustrated distributions during retirement
-Rate of Return expectations should be reduced when distributions are being made
The Ideal/best Permanent life insurance policy
- Quotes from MORE THAN ONE Insurance Company
-Identical illustrations from more than one company allow you to more easily identify superior products
- MAXIMIZE the premium dollars that fit into the smallest
possible death benefit - Inexpensive Investment Options – Fees Matter
- Low Spread between Loan Rate and Loan Credit Rate
-Less than 2% is ideal, some as low as 0.50% or less, are avaiable
- Hire an independent third party for an assessment of
what people are showing you!
Disability Insurance Planning
Group Short & Long Term Disability
- Inexpensive coverage
- Benefits can be taxable, depending on how premiums are paid
- Potentially low monthly cap on benefits paid
Supplemental Long Term Disability
- Covers gaps in some group DI plans
- Can provide more specific definitions of disability that will
protect specialized skill sets
College Savings Strategies
529 Savings Plans
- Can be used for college
expenses at any college or
university - Potential for state taxdeductions
- Account grows tax deferred
- Distributions for college expenses are tax free
- Ideal for long term accumulation needs
Education Savings Trusts
- Prepay tuition semesters for certain state public schools
- Lock in tuition at today’s rates (deposits earn a rate of return equal to tuition inflation rate)
- Ideal for older children with less time for growth before college Cannot be used for other college expenses (but can be paired with a 529 account for other expenses)
Supplemental sources for college expenses
401k Plans
- Most plans allow for an in-service loan up to 50% (up to $50k) of your account value to be taken out, usually at a low net interest rate
- 5 year payback period.
- Potential tax liability if you leave your job before paying back the loan
Student Loans
- Deferred payment student loans can provide you and
your child time to get on better financial footing
before payments are due - Help pay back loans without sacrificing your own
financial goals
Asset Allocation Techniques
Building a Balanced Investment Portfolio
Portfolio Building Process:
- Determine Stock/Bond Mix -60 Stock, 40% Bond
- Decide on US vs. International Mix 3. Determine US Large/Mid/Small Mix
- Determine International Developed vs. Emerging Markets
- Decide on Long/Intrm/Short Term Bond Holdings
- Determine Stock/Bond Mix
– 60% Stock, 40% Bond
- Decide on US vs. International Mix
– 65% US Stock, 35% International Stock
- Determine US Large/Mid/Small
- Mix
- Determine International Developed vs. Emerging Markets
- Decide on Long/Intrm/Short Bond Term Holdings
Market Neutral Allocation Russell 3000 Index
- Asset classes were created in order to segment stocks by shared risk characteristics
- Each style box contains a basket of stock with comparable return and volatility expectations
.
Building a Balanced Investment Portfolio
- Determine Stock/Bond Mix
– 60% Stock, 40% Bond
- Decide on US vs. International Mix
– 65% US Stock,
35% International Stock
- Determine US Large/Mid/Small Mix
– 72% Large, 20% Mid, 8% Small
- Determine International Developed vs.
Emerging Markets - Decide on Long/Intrm/Short Term Bond Holdings
Alternative balanced portfolio
Portfolio Building Process:
- Determine Stock/Bond Mix
– 60% Stock, 40% Bond
- Decide on US vs. International Mix
– 65% US Stock,
35% International Stock
- Determine US Large/Mid/Small Mix
– 72% Large, 20% Mid, 
8% Small
- Determine International Developed vs. Emerging Markets
– 75% Developed Intl Stock, 25% Emerging Markets Stock
5. Decide on Long/Interm/Short Term Bond Holdings
Fixed Income allocation
Alternative balanced portfolio
Portfolio Building Process:
Determine Stock/Bond
– 60% Stock, 40% Bond
Decide on US vs. International
– 65% US Stock
35% International Stock
Determine US Large/Mid/Small
– 72% Large, 20% Mid, 8% Small
Determine International Developed vs. Emerging Markets
– 75% Developed Intl Stock, 25% Emerging Markets Stock
Decide on Long/Interm/Short Term Bond Holdings
– 0% Long Term, 70% Intermediate, 30% Short Term
Retirement Savings Strategies
Three Types of Accounts
Tax Deferred assets
- Traditional IRA’s, 401k, SEP,
SIMPLE, KEOGH, 457, 403b, etc. •Money goes in pre-tax, comes out as Taxable Income
- Pay no taxes on earnings
Employer-sponsored Retirement Plans
- 2013 limit: $17,500
-+$5500 catch-up for those over 5o
- Maximize Employer Match – 100% return on investment
Traditional IRA
- Likely your largest asset during retirement
- All retirement plans you accumulate during working
years will roll into this account - Ideal if tax rates decrease in the future
Tax free assets
- Roth IRA, Roth 401k
- Money goes in after tax, comes out Tax Free
- Pay no taxes on earnings
Employer-sponsored Roth 401k Plans
- 2013 limit: $17,500
+$5500 catch-up for those over 5o
- Money goes in after-tax, comes out tax free
Roth IRA
- Maximum income of $112k single / $178k
married for 2013 - Roth(k)’s will roll into Roth IRA
•Ideal if tax rates increase in the future
Taxable assets
- Pay taxes on interest and realized capital gains each year
Investment Accounts
- Money goes in after tax, basis comes out tax free
- Pay tax on 1099 income each year
- Surplus account for savings when all other savings options are max funded
- Pay capital gains tax rate on long term gains and qualified dividends
- Pay income tax rate on short term gains and ordinary dividends
- Balance of muni-bonds and tax managed equity funds makes this a perfectly viable savings opportunity
Control Your Tax Rate During Retirement
- Balance Savings between Taxable, Tax Free, and Tax Deferred accounts
- Allow for strategic distributions during retirement
- Maximize tax bracket distributions
example investor (age 72): needs $225,000/yr
- Has Rental Property income of $18,000/yr
- Social Security income of $36,000/yr
- Pension income of $16,000/yr TaxRate
- RMD for 2013 of $31,500
Income Bracket
- Total Taxable Income of $101,500/yr
- Pull $44,900 more from Tax Deferred Assets
– Maximize 25% Tax Bracket
- Pull remaining $78,600 from Tax Free Assets and Taxable Assets
Basic Estate Planning
Make the Decisions Now
-Or-
The State Will Decide for You
Will & Advanced Directives
- Written document that outlines your final wishes, including:
- Designating a Guardian for your children
- Bequest assets and valuables to your heirs
- Make charitable donations
- Advanced Directives also specify what type of medical
treatment you desire, should you become incapacitated
Durable Power of Attorney
- An advance directive, you provide another individual the
power of attorney to allow them to make bank transactions,
sign checks, apply for disability, etc., in the case of an incapacitating medical condition
What to Look For in a Financial Planner
Look for a Certified Financial Planner – CFP®
- Held to higher level of fiduciary care by the CFP Board of Standards
- Search for a CFP in your area at www.cfp.net
Broker/Dealer (BD) vs. Registered Investment Advisor (RIA)
- BD’s charge commissions for products, leaving room for a potential conflict of interest
- RIA’s charge an asset based management fee, aligning your interests with theirs
- RIA’s are held to a 3(21) or 3(38) fiduciary standard to put your interests ahead of their own
Review their Client Service History
- Check for a history of past client complaints at www.brightscope.com
None of this should be taken as financial advice. Please do your own research
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