Personal Financial Plan
A person’s financial success is determined by his ability to allocate and utilize his own financial resources. Planning is an integral part of every person’s future aspirations for a better life even retirement. However, financial planning is not as simple as outlining the current personal assets versus liabilities because similar to business financial planning it also considers both external and external environmental attributions. Internal factors vary from risk tolerance, projected financial situation, discipline, goals, spending, saving and investment patterns and consumption. On the other hand, external factors include social, legal, political, taxation and technological influences that has either direct or indirect effects to personal finances (Dalton, 2005, p. 38). In order to create a comprehensive personal financial plan, the step is to analyze the current financial situation and assess possible outcomes using the appropriate financial tools. Secondly, short-term, mid-term and long-term goals will be identified and ranked according to their importance in relation to expected and available resources. Lastly, due considerations will be given to asset protection, budgeting, time value of money, savings, debit/credit, estate planning and investment. After which, the first two steps will be incorporated to complete a financial development plan that will provide a clear picture of future finances.
The financial model represents the family’s current financial situation and some illustrations of the possible direction that my family’s financial situation may take. The future market and economic conditions are generally unknown and at any time will changes at any point. These assumptions were made to represent the economic and market conditions that may occur in the future and was designed to promote actions needed to address any possibilities of risk. The main objective is to aid the family in terms of managing and maintaining a steady financial situation under changeable circumstances.
- The family currently has assets estimated at $433,000.
- Current liabilities are estimated at $140,000.
- The entire family’s combined net worth is estimated at $293,000.
- The family currently has a total of $183,000 worth of working assets adding $16,000 more per annum.
- My dad wants to retire at 64 and mom wants to retire at the same age as well.
- The monthly after-income tax needed at the moment is $4,792
- In order to sustain finance until the age of 90 my parents would still need income even after retirement.
- Meeting my educational goals will need an annual savings of $11,252 or $938 every month.
Actions: It is apparent that my parents may run out of money before they reach the last life expectancy of 90 years old. However, there are range of possible options that they can take in order to improve the situation including increasing the rate of investments, increase annual savings by as much as $2,200 per year, reduce their retirement spending needs by means of deferring retirement for about 1 year and lastly, combine all the aforementioned and decrease requirement for each.
It is necessary for the success of the financial planning to ensure that the asset allocation is aligned with the goals. Therefore, it is important that the suggested assets should be compared to the current allocation because it the appropriateness of the allocation is beneficial to the situation provided that the assets have been allocated precisely. Below is the graphical representation of the asset allocation in relation to the above asset worksheet.
The above represents a simple allocation of assets, which can be improved by diversifying the types of securities within the mix (Warschauer, 2002). Below is the suggested allocation, which represents a variation of asset allocation mix.
Financial planning for the future requires organizing situations wherein the family would not be able to all the desired financial goals. Prioritizing is the key in achieving the desired goals by means of differentiating the goals and evaluating the long-term impacts of expenses towards the current financial situation for financial sustainability (Trochim and Linton, 1986). In addition, expenses associated with financial goals appeared to have a potential effect that would lead to a sustainable financial stability throughout life. Based on the current plan and suggested mix it appears that the success rate of the plan is likely to reach 25% Since it was indicated earlier that the planned expenses are also important, evaluations need to be conducted in order to determine the effects of such expenses to the sustainability of the long-term plans.
In order to create the illustration, the current plan has been re assessed of its calculations several times excluding the associated expenses along with the various priorities of the financial goals. It starts with calculating the only the highest priority goals, retirement expenses and other expenses identified as important. Furthermore, the highest priority items will be categorized accordingly as primary and secondary and options will also be included. There are three expenses mentioned earlier, which are reconstructing the garage, remodeling of the basement rooms and a vacation in France. The categorizations of each expense are based on the current need for them to be executed. For example, the reconstruction of the garage is relatively important because it poses a hazard to other assets such particularly to the vehicles. The secondary priority is the remodeling of the basement room, which is designated as an office and study area. Finally, the French vacation is considered as least important because it is only regarded as a leisure trip, which has no long-term significant benefit to the family other than a self-compensation for long years of hard work.
Essential expenses only
Reconstruction of the garage:
Start Year: 2014 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $8,000
Essential and Primary expenses
Remodeling of the Basement rooms:
Start Year: 2016 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $12,000
Essential, Primary, and Secondary expenses
Start Year: 2018 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $20,000
After reconsiderations have been made to the future expenses, the next step in the process is to create a retirement expense forecast to determine the amount required to spend for retirement. The retirement expense forecast is a combination of estimated Social Security benefits together with pre-defined pension benefits and plotted to show estimated living expenses on an annual basis during retirement. The estimation will begin during the legal retirement age of 60 years old and will continue until the pre-determined life expectancy. The basis of retirement expenses is the goal objective that has been adjusted according to inflation rate (personal.vanguard.com, N.D.). There is a rule of thumb being suggested when planning to live at a rate of about 80% of one’s current yearly income. It may sound feasible for a moment, but other factors such as cost of healthcare, cost of living, tax hikes and inflation also poses an immense impact to the overall outcomes of the retirement forecast.
Ultimately, the amount allotted to the retirement fund is a kind of decision that will depend upon several factors such as the type of lifestyle intended in the future. It also explains the reason for maintaining a considerable plan that will serves as a guide in making financial decisions. In addition, several steps need to be considered when it comes to estimating expenses. First, is the non-discretionary spending, which includes residence mortgage, transportation, healthcare, insurance premiums, utility bills and taxes. Secondly, discretionary spending, these are the things that can either be reconsidered to be stopped at will or can be identified as the least priority. Some examples may include hobbies, travel, gifts, entertainment and charitable donations. Third, is inflation, this is a kind of expense that cannot be modified at will. Financial planning always needs an estimation of the inflation rate because the likelihood that the budget allotted for retirement may change over the years. There could either be an excess or variance to the budget depending on the increase and decrease on the time value of money. Lastly emergency funds, unexpected circumstances will call for an immediate financial response. For instance, one of the family members is being hospitalized and the current healthcare plan will not be sufficient to cover the cost. It is important that the budget also includes expenses during times of immediate need.
After determining expenses, the next step is to sum up the gross income. Income may come from social security, pension plan, retirement portfolio, part-time employment and annuities. Determining all the aforementioned will measure the amount of money coming in to the household and will serves as a benchmark for spending. Maximizing the potentials of the said income streams would alleviate potential risks of running out of money and jeopardizing the long-term financial goals. Subsequently, any instances of shortfalls should resort to reduction of expenses, late retirement, saving more today or taking more jobs than the usual. If there a surplus of funds at hand, it would be best to reinvest excess money back to the retirement portfolio or put more money in the emergency reserves.
Other Considerable Factors in Planning
Like any other financial planning the complex and critical components include considerations for estate planning. An effective financial plan needs careful coordination of various areas in the financial plan. The primary goal of the estate planning section is highlighting the concept of illustrating potential benefits of estate planning basic techniques. Back in 2010 the estate tax rate was at zero (Larsen, 2010). Most people would minimize estate tax exposure as part of their primary goal. Some of the basic techniques used for estate planning are the maximization of the Applicable Exclusion Amount, Revocable Living Trust, Unlimited Marital Deduction, Annual Gift Exclusion, Irrevocable Life Insurance Trust and Unlimited Charitable Deductions. Other goals might also include minimizing income tax, estate liquidity and managing administrative, probate and other expenses.
General assumptions made based on the family’s current financial standing and planning data, it can be assumed that funding a credit shelter will allow the family to utilize the available exclusion amounts, which is currently at $1,000,000 per person. Assumptions also include life insurance benefits that were kept out of the taxable estate. If the household has a $211,706 plus other assets amounting to $250,000 minus the estate tax base of $303,572 and exclusion amount of $2 Million ($1Million for each parent) the estimated tax would be $0.00.
Financial planning is crucial for the survival of an individual or in this case, our family. Determining the amount of money at hand including assets and liabilities is essentially helpful in terms of foreseeing the financial health of the entire family or any survivor after life expectancy. Personal financial planning ultimately leads to the achievement of future goal, being knowledgeable about own finances and being familiar with budgeting. A the budget becomes more familiar, the more the family would be able to cope up with untoward circumstances that has a adverse effect in the family’s financial health. With the apparent unstable economy, unexpected tax hikes and diminishing financial options, it becomes more apparent that financial survival is a key for a sustainable future.
Dalton, M. A. (2003). External Environmental Analysis. In Personal financial planning: Theory and practice (5th ed., p. 38). St. Rose, LA: DF Institute, Inc.
Larsen, K. (2010). Overview of personal financial planning. Professional Development Network, 1(0).
Personal.vanguard.com (n.d.). Evaluate your retirement expenses and income. Retrieved April 24, 2013, from https://personal.vanguard.com/us/insights/retirement/nearing/evaluate-expenses-and-income-needs
Puelz, A. V., & Puelz, R. (1991). Personal financial planning and the allocation of disposable wealth. Financial Services Review, 1(2).
Trochim, W. M., & Linton, R. (1986). Conceptualization for planning and evaluation. Evaluation and Program Planning, 9(4), 289–308. doi:10.1016/0149-7189(86)90044-3
Warschauer, T. (2002). The Role of Universities in the Development of the Personal Financial Planning Profession. Financial Services Review, 11(3).