By Julie Cole, CFP®, FLMI
Annuity Product Manager
Financial planners create a financial plan as a diagnostic tool intended to point out gaps in areas of the plan that need to be addressed. If you have ever had a plan created or have tried to create a plan on your own, here are ten major questions that a financial plan should answer.
1) Is my current monthly savings enough to provide the retirement income I will need?
This is the most important question for many. If you are not saving enough for retirement each month (based on your projected retirement date and monthly retirement expenses),
how much more do you need to save? Generally, this amount is dependent on investment return assumptions, inflation, and your life expectancy.
2) What is the probability that I may run out of money?
With all of the uncertainty in life, understanding the probability of running out of money at various ages is essential. For example, would you be comfortable with a 20% probability
of running out of money at age 85? Most plans include this.Beware, there may be variables (assumptions) that are not reasonable. Example: using a 1% rate of inflation is not realistic.
This will give you a false sense of security.
3) What rate of return do I need to earn on my nest egg to meet all of my goals?
Determining the rate of return you will need to fully fund your golden years is vital, and a financial plan should calculate it. For example, what if you need to earn 9.0% but are 100% invested in bonds yielding 2%? You’ll likely fall short. Conversely, if you only need to earn 3.0% to realize your goals, then why take more risk than necessary? Once you know this,
you will understand what type of investments you need.
4) What is my net worth?
Calculating your net worth is foundational and comparing it to future plan updates is very useful. If your net worth is declining from one year to the next, it could be an early warning sign that action needs to be taken before it’s too late.
5) What are my debt ratios?
Debt serves an important role if used properly. Without it, many would not be able to buy a car or a house. However, there are prudent limits and exceeding these limits could jeopardize your future lifestyle. A financial plan should calculate all relevant debt ratios.
6) What is a safe withdrawal percentage and why is it important?
Academic studies have demonstrated that withdrawing less than 4.0% of your account value each year should keep your portfolio humming during retirement. For example, a
$40,000 withdrawal on a 1 million dollar portfolio is 4.0%. Withdrawing more than 4.0% could put a strain on your nest egg and make running out of money a greater possibility.
7) What is my probability of running out of money at various levels of expenses?
Sometimes the best laid plan will fall short. What if life throws you a curve and expenses are much higher than expected? A financial plan should forecast expenses in excess
of the assumption, just in case the unexpected happens.
8) Does my financial plan identify all of the risks or road blocks to achieving my goals?
If your plan doesn’t identify the risks and how to minimize or transfer these risks, then your plan is not complete. Anticipating the roadblocks, such as disability, layoffs, death,
poor life style choices, divorce, handicaps, and natural disasters is critical. A 20 year-old entering the work force has a 1 in 4 chance of becoming disabled before attaining age 65 and a 1 in 3 chance of being unemployed for at least 6 months before reaching retirement age.
9) Does my plan make provisions for substantial increases in medical expenses in my later years?
Planning for the cost of medical care in retirement is essential. The National Institute on Aging and the Social Security Administration published data collected from 2002-2008 on
a survey of 26,000 American households where one or both spouses were over the age of 60. The study found that the average annual out-of-pocket spending per household on medical insurance and care was $7,737. These out-of-pocket costs are in addition to Medicare premiums deducted from Social Security benefits.
10) Have I set up the most efficient means of transferring assets to my heirs upon my death?
Updating your will and beneficiary designations is important when you have had a life changing event. Spouses die, children marry, and get divorced. State laws and federal
estate taxes change. Keeping your estate plan current involves updating beneficiary designations as family situations change.
Financial plans are the culmination of recommendations for improvement in your financial situation after information is gathered and analyzed. A comprehensive plan will identify
risks and tax strategies, recommend investments, and create a cash flow plan to reach retirement goals and the desired distribution of your assets at death. Planning is never really complete because of the never ending changes that occur during a lifetime. But, planning can help us achieve most of our goals.