When it comes to financial planning, the specifics of everyone’s goals differ. When you will retire, how you want to live in retirement, and the personal financial challenges you will face in life vary by person. But, there is one goal everyone shares, and it trumps all the others: peace of mind. Wherever you are in life, you want to feel confident about your financial present and future. Following the steps below will set you up for financial peace of mind.
Know Your Current Financial Stage
In what stage of your financial life cycle are you? The three main stages are: accumulation, distribution, and preservation. In the accumulation phase, you are putting aside all of your net income towards retirement. In the distribution phase, you have started decumulating by withdrawing funds from your retirement accounts. In the preservation phase, you plan for what happens to your assets after you are gone. Knowing which phase you are in is the starting point to constructing a financial plan.
Create a Personal Balance Sheet and Cash Flow Statement
To know how to get to where you want to go, you must review today’s hard numbers. Create a personal balance sheet — much like that of a business — where you record all your assets and liabilities and net them out to determine your net worth. List all of your cash and cash-like assets (ex. bonds that mature within a year), your invested assets (ex. 401ks, IRAs, taxable investment accounts), and your personal use assets (ex. your primary home, vacation home, art collection). Next, list all current (mature within a year) and long-term liabilities (ex. home mortgage). Net your assets and liabilities to determine your net worth.
Follow a similar system for your cash flow statement. Here, you will net all of your inflows (earned and rental income, social security, etc.) against your outflows (living expenses, taxes, etc.). If netting your inflows and outflows leaves a positive number, you have a surplus; a negative number means a deficit. With both your balance sheet and cash flows in hand, you can plan to achieve your financial goals.
Understand Your Comfort with and Exposure to Risk
Every investment portfolio involves some risk. Building your plan requires you to know how much risk you can accept. Conservative investors generally have very little tolerance for portfolio volatility. Preserving capital is their top priority. Aggressive investors are generally indifferent to large fluctuations in their portfolio value. They prioritize growth over safety of principal. Are you in one of these two categories, or somewhere in between?
With your comfort level in mind, it is essential to review your current risk exposure. Are you a conservative investor who owns high-risk investments? Perhaps you are an aggressive investor allocated too conservatively. You should ensure that your risk tolerance is reflected in your asset allocation.
Set Goals, Mitigate Concerns
The purpose of financial planning is to achieve financial goals. In following the steps we have outlined above, you have created the foundation for building a plan. It is time to decide what you hope to accomplish financially. Are you just starting out and need to create a retirement savings plan? Are you near retirement and want to ensure your assets will last the rest of your life? Write down your goals, and work on a plan to realize them.
Goals are the fun part of financial planning, but there is much more to consider. You also must account for concerns, or to put it more strongly, fears. What about your finances keeps you up at night? Do you worry about running out of money in retirement? Will have to reduce your standard of living? Will the next stock market selloff cripple your plans? Write down your fears and do your best to build a plan that mitigates them.
Build a Plan
By now, you know your phase in the financial life cycle, understand your net worth and net cash flows, and know your risk tolerance and exposure. You have also outlined your goals and worked to mitigate your concerns. Now, it is time to put the plan together to ensure you stay on track. If you are many years before retirement, you should pick a targeted retirement date, calculate your retirement needs, and create a retirement savings plan. If you are near retirement or already retired, you should review the sustainability of your retirement, based on your life expectancy and asset allocation.
Following the steps highlighted in this article should provide you with much more confidence and peace of mind about your financial situation. For assistance from a professional financial planner and wealth manager, please contact Soren Christensen and Advanced Wealth Advisors at the phone number or web address below.
(239) 455-1100 | AWAdvisors.com