EVALUATING YOUR FINANCIAL POSITION - STEP 1

Evaluating your FINANCIAL POSITION is usually the starting point in a financial plan. It reflects where you are today in terms of Net Worth and Cash Flow. By developing assumptions about growth rate and income distributions about your assets and assumptions about future income and expenses, upon developing your financial statements, you should have a pretty good idea if you can achieve your financial goals. 

Begin by buiding your Balance Sheet or Statement of Net Worth. In this statement, you will include all of your assets. Assets are things you own such as bank and investment accounts, life insurance policies with cash value, your home, business interests and personal property such as cars, boats, jewelry, art and so forth. Another section of your Balance Sheet lists all of your Liabilities. Liabilities are debts that you owe such as mortgages, student loans, credit card debt and the like. When the liabilities are subtracted from your Assets, what remains is your NET WORTH. 

Budget Statement 
The next statement you need to complete is a budget statement. This is usually a difficult part of the data gathering process. If you are a net worth individual with plenty of excess income, you can usually get by with general assumptions such as stating that you spend $10,000 a month. For most people though, engaging in the exercise of building the budget can be a revealing event. Many of us don’t realize where our money is going and how much is being spent indiscriminantly. Many people cannot identify where 10%, 20% and sometimes 30% of their money is going! Often, making changes in your budget results in the success or failure of achieving your goals. 

Goal Setting - The Key to Success

Goal Setting

Gary Lewis

Asset Design Center

One of the most important elements in Financial Planning is Goal Setting. What is it that you want in life? What’s important to you? Many of us really have no clue. We just want to be financially secure but what does that mean?


Goals are different depending on your age and position in life. If you are young, saving for and planning for a wedding might be the most important thing to you. Already married with children on the way? Moving out of the apartment into your first home might be the priority. And with children, for sure, education expense planning is important. Probably number one on the list of most people is RETIREMENT PLANNING.


Whatever your goal might be or how many goals you have, the important thing is to be specific. The more specific you are about what you want, the more effective the planning process will be.


1. Define your goal. In this example, let’s use I want financial independence in our retirement years.


2. State specifically the dollar amount the you need to achieve. I want to have an after-tax income of $60,000 per year at retirement.


3. Be sure to consider inflation factors. I want to have an after-tax income of $60,000 per year, inflating at 3% annually, starting at retirement.


4. Define the time frame that you want to have this goal. I want to retire at age 59 with an after tax income of $60,000 annually, inflating a 3%. I expect that my wife and/or I will survive until age 95.


As you can see, there is no doubt about the amount of the goal. Once we know this goal, we can apply our assumptions. For example, if I were able to earn an after-tax rate of 7% on my money in retirement, I know that I would need to save a little more than $1.1 million to secure this cash flow stream in retirement. You can then devise your plan to accumulate the desired amount.


If you are vague about your goals, you will have no focus. In the end, nothing will be accomplished.

Tax Planning

So many are so worried about saving enough for retirement that they totally ignore the tax consequences.  No, not today's tax bill but that when they retire.

We know today that federal income tax rates are low by historical standards.  With the federal deficit at $14 trillion and climbing, will tax rates still be low when you retire?  Who can say?  Still, managing your tax bill in retirement should be a key issue.  If your financial planner has not gone over this with you in detail, you better find out why not!

Tax Buckets

Consider the various "tax buckets" that are now in effect.  Ordinary income such as your salary, pensions, IRA distributions and CD interest are all considered Ordinary Income and is taxed at your highest tax bracket.  There is no mercy here.  The problem is that most people put as much into their 401(k) and IRA without considering the alternatives.

Other tax buckets exist such as the 15% long-term capital gains bucket and the TAX FREE or Tax Exempted bucket.  The trick is establishing investments in all three buckets so that when you are retired, you can harvest the income you require while not paying an arm and a leg in taxes.

HOW IT STANDS TODAY

If you are married and file jointly, your tax bracket stays in the 15% level up to $69,000.  Considering the standard deduction and personal exemptions, your adjusted income can be in the upper $80s before you move into the 25% tax bracket. That's not bad, you might think.  My pension will be this much and my social security will be this much and I can stay under the 25% tax bracket.  But this is short-sighted. What could happen?

What if you or your spouse dies?  What happens then to your taxes?  You now find yourself a single taxpayer.  Your tax brackets change considerably!

Now you move into the 25% tax bracket at $34,500.  Your standard deduction is less and you lose an exemption.  

Given the same income stream as before, your tax burden may now be $10,000 more!  

OTHER EVENTS

Only after the fact do you hear people talk about it.  Once you reach 70 1/2, you are required to take minimum distributions from your IRAs.  Required! Even though you might not need the money.  This could easily kick you up into a higher tax bracket or possibly disqualify you from senior freeze and other benefits that have maximum income requirements.  Without pre-planning, there is little you can do but pay for the mistakes of lack of planning.

And, it's probably not unlikely to believe that tax rates will be higher in the next 10 to 20 years.  There is evidence that in the next ten years, the federal deficit will only continue to increase.

With proper planning today, you will have a much better chance of beating the tax man when you retire.