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Planning for Your Financial Future

Financial goals can be as varied and diverse as the individuals who strive for them. And, while some future wishes might seem unattainable, the truth is that with the proper financial plan - and corresponding actions - it is possible to achieve the financial future that you desire. With this in mind, the earlier you can start planning your financial future, the better chance you have of reaching your goals.

Where You Stand Now

Just as with any successful journey, you must understand where you are now. You need to get a solid understanding of your current finances and how they fit together to form a lifetime strategy. Elements might include your personal savings, retirement savings, your present and future income needs, and expenses. This gives you a solid starting point and provides you with an indication of how much you will need to do in order to reach your ultimate financial goals.

The key components of your overall current financial situation include:

  • Assets - Your assets essentially include "what you own" - even if you still owe a debt on it. For example, if you own your home but you carry a balance on your mortgage, you should still include the current value of that home as an asset. Other assets can include the value of your retirement plan, personal investments, and any collectibles such as art, coins, and precious metals. Also, if you own a business, this too counts as an asset.
  • Liabilities - Oftentimes, purchasing an asset can also mean taking on debt. This can be a good thing - provided that the value of the underlying asset is increasing in value (as in a mortgage) or provides a high return on investment (as in student loans). You will likely have other liabilities too, such as an auto loan, credit card balances, and home equity lines of credit. When you have listed all of the debt that you carry, add it all up in order to get a total.
    The total value of both assets and liabilities gives a clearer picture of your overall net worth. Net worth is determined by subtracting the total amount of your liabilities from the total amount of your assets.
  • Income - Your income will also have a bearing on your future financial plan prior to retirement. This is because you need to find a balance between paying your bills and other obligations, and subsequently setting aside a certain amount each month in savings. One good rule is to "pay yourself first." This means making your savings account the first “bill” that you pay, whether that is $1 or $1,000. In doing so, you will be taking care of the most important obligation first, your financial future.   During retirement your income will greatly depend on how long your funds need to last and how much money you would like to leave (or not) to heirs or charity. Attempting to draw too much income can lead to premature depletion of your retirement savings.
  • Expenses - Keeping expenses in check is an essential part of creating your financial future as well. This means staying away from impulse and other unnecessary purchases that can take funds away from your savings and investments. Depending on how much money you would like to pass (or not pass) on to heirs or charity, you may also want to adjust your spending in retirement accordingly. When considering how much to budget for future expenses be sure to consider the impact of inflation which is higher for things like gasoline and healthcare.

What Does Your Financial Future Look Like?

Most people have regularly dreamed about what they would do if they had the time and the money to choose any activity in retirement. But getting there will entail envisioning just exactly where you want to go, and forging a path for the journey.

Some investors consider this vision to be a "blueprint" of sorts, guiding them towards the goals they wish to achieve. Therefore, when starting to plan your financial future, it is often best to "begin with the end in mind."  But the most difficult part of the journey is having the patience and discipline to stick to a plan regardless of short term circumstance.

Determining Your Investment Goals

Creating your ideal financial future will entail taking specific steps to get you closer to where you want to be. With this in mind, consider the end result that you wish to attain and then work backwards to pare down the steps into bite sized pieces.

For example, if your goal is to generate retirement income of $5,000 per month from your invested funds, you must determine the amount of capital that you need, invested at what rate, that will allow you to do this. Once this number has been established, you can work towards setting aside the proper amount on a regular basis to achieve this.  How long will you need to live on this amount? If you need $5,000 per month for 30 years it’s vital to consider the impact of inflation. After 30 years, $5,000 dollars will likely have less than half as much purchasing power, so some growth may be necessary even for a very conservative investor.

What Could Go Wrong?

Even the best laid plans can include some –setbacks—investing is no exception. There are myriad possibilities that could distract you from the long term nature of investing, or set you back in the short term. Long term investing of any kind is likely to include these periods.

While some of these factors, such as a volatile market or poor economic conditions, are not in your control, there are others that can be overcome if you take proper actions.

For example, not having clear investment objectives can be a real negative when it comes to successfully building your portfolio. However, by really focusing on what it is that you are trying to achieve, and then creating a plan around these goals, you will help increase your chances of success over longer periods of time.

Likewise, having a set financial plan can also help you to avoid making investment decisions that are based on emotion rather than fact. Many investors react to poor market performance by selling their investments when they lose value. This, however, essentially locks in your losses.

When the time comes to convert assets to income, investors often have difficulty envisioning the process. This is due in large part to years of an "accumulation" mindset versus "decumulation," or using their assets to create a long-term income stream.

It is here that investors may instinctively jump to income producing products such as annuities, without having a true understanding of their long term investment objectives as well as the potential surrender charges, fees, and inflexibility of such products. In any case, having an experienced financial professional on your side can help you to make the right decision for your specific needs. 

Working with an investment professional who has experience in all types of market conditions can help you with your portfolio, as it is essential to have a knowledgeable "coach" in both good and poor economic times.

Remember To Include Taxes

Certainly, most people are familiar with how their income is taxed, as there is typically a notable difference between gross and net pay. But taxes also come into play on the income and the gains that you receive from your investments.

Taxation may differ, depending upon the type of investments that you hold, as well as the type of investment account that you have. For example, the taxes on income and gains that remain inside retirement accounts such as a 401(k) or IRA will be deferred until the account holder begins taking receipt of their funds.

Gains - or capital gains - that are obtained in personal investment accounts are generally taxable in the year that they are received. However, not all gains are taxed equally. The amount of tax will depend on whether the gain is considered to be short or long term.

Short term capital gains are those that arise from an asset that you have held for less than one year. These gains are taxed at the investor's ordinary income tax rate, which is dependent upon the amount of his or her total taxable income. Conversely, long term capital gains are those that come from investments that have been held for one year or more.

Long term capital gains have their own tax rates that are dependent upon an investor's income and tax filing status. It is important to talk with your tax advisor regarding the best course of action for your specific situation as it relates to assets, income, investments, and taxation.

However, not all investments are created equal. Annuity gains are taxed at ordinary income tax rates, not the potentially more beneficial capital gains rates. Life insurance, stocks, bonds, and most other investments also receive a “step-up” in cost basis upon death so your beneficiaries don’t get hit with a lifetime of taxes. Annuities do not receive this beneficial treatment. Any taxes owed on the annuity will be paid by the recipients.

Designing a Financial Plan

Designing the ideal financial plan for your specific situation will take vision, planning, patience, discipline and careful action in terms of constructing a foundation and then building upwards from there. It will also require that you regularly review your plan, in order to account for any personal or financial changes that may have taken place in your life.

By making informed investment decisions, you can also avoid many of the pitfalls that can occur when moving towards important financial goals. Working with an experienced financial professional can help you to navigate the landscape with discipline and rational decision making and guide you towards a successful financial future.

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