Skip to main content

Sound Advice: September 23, 2020

Financial Planning: The Basic Recipe 

In the simplest terms, financial planning is about the question all of us should be thinking about: "Will I have enough?" 

The answer to that question requires a fair amount of information gathering in four areas: What you own, what you owe, your income, and your expenses.  Few people really have a handle on this.  So until you get a grip on where you are today, it's quite difficult to make a plan to get you where you hope to be tomorrow. 

Three of the four parts of the equation are easy enough to figure out.  The hitch, however, is on the expense side.  More often than not, the task of coming up with reasonable numbers for a couple of dozen or more key categories is a trip into the unknown.  You probably won't have much difficulty pinpointing the cost of things like cable TV and heating, but do you really know what you've been spending on gasoline and groceries?  Probably not.  How about gifts, clothing or eating out?

Still, let's assume that you have somehow managed to put together a budget and identified your assets and your liabilities.  If everything remains constant from now until some day in the distant future, the task would be close to a no-brainer. 

But things change.  When you plug in numbers, they will almost always change over time.  And when you retire, your income will shift from employment earnings to such things as earnings on investments, pensions, and social security.  With the exception of fixed-interest securities, your returns on investments will vary from year to year.  Pensions (if you are fortunate enough to have one) usually remain constant, though a few have built-in cost-of-living adjustments.  Social security is still around, but its future is anything but certain.

The expense side of the equation is also murky.  Although we'd all like to think that we'll be around for a long time, it's essential to prepare for changes in expenses upon retirement as well as changes in expenses when there is only one surviving spouse.

Add to that occasions when there is an unusual expense, perhaps a new roof or a new car.  Or for younger families, the cost of educating children.  Shocking as it may be, the cost of educating today's newborns could be $500,000 or more.  For these kinds of things, you can't just wing it.  Planning for children's education needs attention on Day One.

Along the way, there will often be such nonrecurring items as inheritances or perhaps funds from the sale of a larger home when downsizing.  Whatever the case, the point is that a proper financial plan must be a dynamic instrument.  It's something that needs to reviewed regularly and modified as your situation changes.

For all plans, the bottom line is that either you will have enough to continue living in your hoped-for lifestyle or you will have to work longer, spend less or increase the return on your investments.

The earlier you address these issues, the more likely that you will have enough.

N. Russell Wayne, CFP®

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more