Financial Planning & Investment Management
Financial Planning & Investment Management Presented By: Gerard J. Kassouf, CPA, PFS, CFP® Beth Vittitow, CPA, PFS, CFP®
What is Financial Planning? • Financial planning is a process: • • • • •
What do you want? What will you have? Will you have a shortfall? What strategy will you employ? What actions will you take?
Develop your Financial Goals – What Do You Want? • • • •
Identify your specific goals Identify your time horizon Quantify your saving goals Prioritize your saving goals – need vs. want
Identify Your Specific Saving Goals • • • • • •
Pay down existing debt Create an emergency fund Save for retirement Accumulate a down payment for a house Build a college fund for your children’s education Set aside money for a specific short term goal (vacation, car, etc.)
Assess Your Resources • • • •
What are your assets today? What future income will you have? What future earnings on investments will you have? What expected future benefits from sources such as your employer retirement plan or social security will you have?
Examine Your Spending Habits • • • • • •
Keep a list of all spending for 3 months Compare total spending to take‐home pay Use a program to automate it‐ such as www.mint.com Make and review goals Focus on one area at a time Identify a weakness and be creative
“Good Debt” vs. “Bad Debt” • Good Debt: Debt borrowed to purchase an asset that will increase in value (home, education) • Bad Debt: Debt borrowed to purchase an item that will disappear (cup of coffee) or decline in value (car)
Reducing Debt • Simple and Straightforward • • •
Stop adding to the current amount owed Lower the interest rate and/or late fees Pay as much as you can on the debt
Credit • www.annualcreditreport.com • Credit Score • • • • •
35% Payment History 30% Available Credit 15% Length of credit history 10% Inquiries 10% Type of Debt
Saving vs. Investing • Savings is not spending money and needs to be done in a regular, disciplined manner. • Investing is doing something with money to earn a return and needs to be done carefully and with due consideration
Create an Emergency Fund • Set aside 3‐6 months of living expenses • Use it for emergencies, not discretionary spending • Replace funds used
Evaluate Your Alternatives • Consider pros and cons of each option • Consider the opportunity costs of what you will give up to pursue your goal through each course of action
Identify Alternative Courses of Action • Reallocate existing resources to increase savings • Generate new resources
Insurance
Property & Casualty •
Homeowners Insurance
Property & Casualty • Homeowners Insurance Replacement versus actual cost Personal property inventory Automatic value increases in comparison to value
Property & Casualty • Personal Liability Insurance/ Umbrella Policy Personal liability above and beyond coverage of auto and home policy Sold in increments of $1 million
Disability • Employer and association coverages • Private coverage • Government coverage
Disability Items to review • Occupational Definitions • Waiting Period/Elimination Period • Benefit Period
Life Term Insurance • Stated period of coverage at affordable cost • No value during or at end of term • Term Riders • •
Guarantee Insurability Convertibility
Life Permanent Insurance • Higher insurance cost with forced savings • Cash value can be borrowed or withdrawn for goals • Asset Protection
Education Planning
Education Planning • 529 Plans • Educational IRAs
Education Planning 529 Plans • Federally tax free withdrawals • Alabama resident/plan benefits • Investment Options • High Contribution limits • Control
Education Planning Alabama 529 Plan • State tax deduction for contributions and rollovers • State tax free withdrawals • Age based, static and individual funds • Low minimum contributions
Education Planning Educational IRA • Expansive education years • Income limits for contributions • Limited contributions • Little flexibility
Investments
Major Asset Classes Major Asset Class
Characteristics
Goals
Cash
Matures in less than 1 year
Capital preservation Liquidity
Bonds
Fixed income Varied maturities
Income Capital preservation
Stocks
Company ownership
Possible dividend income Capital appreciation
Avoid Market Timing Asset Class Returns (as of 12/31/16)
• •
You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to capture returns wherever they occur.
Source: Morningstar Direct
Importance of Time Horizon Growth of a Dollar, 1926–2015 (Compounded monthly) $100,000 $16,743 US Small Cap Index $5,386 US Large Cap Index
$10,000
$1,000 $135 Long-Term Govt. Bonds Index
$100 $21 Treasury Bills $13 Inflation (CPI)
$10
$1
$0 1926
1936
1946
1956
1966
1976
1986
1996
2006
The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
2015
In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. US Small Cap Index is the Fama/French US Small Cap Index; US Large Cap Index is the Fama/French US Large Cap Index; Long-Term Government Bonds Index is 20-year US Government Bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. Fama/French Data provided by Fama/French. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Past performance is no guarantee of future results.
Save for Retirement • Start early • Take advantage of employer matches • Tomorrow’s retirees will need to depend more on their own savings to fund retirement • Discuss retirement plans with your spouse
Retirement Savings Accounts Taxable Account
Employer Roth 401(k)
Pre‐Tax Employer 401(k)
Salary
$40,000
$40,000
$40,000
Pre‐tax $
$2,000
$2,000
$2,000
Tax at 25%
$500
$500
N/A
After‐tax $
$1,500
$1,500
$2,000
Employee contribution
$1,500
$1,500
$2,000
Employer match – assume 4%
N/A
$1,500
$1,600
Total contribution
$1,500
$3,000
$3,600
% of salary contributed
3.75%
7.50%
9.00%
Retirement Savings Accounts Account Balance in 30 Years $284,604
$300,000 $237,175
$250,000 $200,000 $150,000
$118,587
$100,000 $50,000 $0 Taxable Account Employer Roth Pre‐Tax Employer 401(k) 401(k) *Assume 6% annual rate of return
Retirement Savings Accounts Available After‐Tax in 30 Years $237,175
$250,000
$213,453
$200,000 $150,000
$118,587
$100,000 $50,000 $0 Taxable Account Employer Roth Pre‐Tax Employer 401(k) 401(k) *Assume 6% annual rate of return
Social Security • What age to apply? • Spousal Benefits • Survivor Benefits
Estate Planning
Estate Planning • • • •
Last Will and Testament Trusts Power of Attorney Advance Health Care Directive
Estate Planning Assets that pass by contract • Life Insurance • Retirement assets/IRAs • POD accounts • By ownership • Trust
Estate Planning Last Will and Testament • Personal Property Distribution • Remaining Asset Distribution • Trust for children • Executor • Guardian
Estate Planning Power of Attorney • Financial Decisions • Springing versus sprung
Estate Planning Advance Health Care Directive • Living Will • Health Care Proxy
What if I Die Without a Will?
If you are single ½ to mother
½ to father
What if I Die Without a Will?
If you are married with no children
First $100,000 plus ½ of the balance to the spouse
½ of the balance to parents
What if I Die Without a Will?
If you are married with children
First $50,000 plus ½ of the balance to the spouse
½ of the balance to children
Beneficiary Designations • Check beneficiary designations on qualified accounts and insurance policies
Questions?
What is Financial Planning? • Financial planning is a process: • • • • •
What do you want? What will you have? Will you have a shortfall? What strategy will you employ? What actions will you take?
Develop your Financial Goals – What Do You Want? • • • •
Identify your specific goals Identify your time horizon Quantify your saving goals Prioritize your saving goals – need vs. want
Identify Your Specific Saving Goals • • • • • •
Pay down existing debt Create an emergency fund Save for retirement Accumulate a down payment for a house Build a college fund for your children’s education Set aside money for a specific short term goal (vacation, car, etc.)
Assess Your Resources • • • •
What are your assets today? What future income will you have? What future earnings on investments will you have? What expected future benefits from sources such as your employer retirement plan or social security will you have?
Examine Your Spending Habits • • • • • •
Keep a list of all spending for 3 months Compare total spending to take‐home pay Use a program to automate it‐ such as www.mint.com Make and review goals Focus on one area at a time Identify a weakness and be creative
“Good Debt” vs. “Bad Debt” • Good Debt: Debt borrowed to purchase an asset that will increase in value (home, education) • Bad Debt: Debt borrowed to purchase an item that will disappear (cup of coffee) or decline in value (car)
Reducing Debt • Simple and Straightforward • • •
Stop adding to the current amount owed Lower the interest rate and/or late fees Pay as much as you can on the debt
Credit • www.annualcreditreport.com • Credit Score • • • • •
35% Payment History 30% Available Credit 15% Length of credit history 10% Inquiries 10% Type of Debt
Saving vs. Investing • Savings is not spending money and needs to be done in a regular, disciplined manner. • Investing is doing something with money to earn a return and needs to be done carefully and with due consideration
Create an Emergency Fund • Set aside 3‐6 months of living expenses • Use it for emergencies, not discretionary spending • Replace funds used
Evaluate Your Alternatives • Consider pros and cons of each option • Consider the opportunity costs of what you will give up to pursue your goal through each course of action
Identify Alternative Courses of Action • Reallocate existing resources to increase savings • Generate new resources
Insurance
Property & Casualty •
Homeowners Insurance
Property & Casualty • Homeowners Insurance Replacement versus actual cost Personal property inventory Automatic value increases in comparison to value
Property & Casualty • Personal Liability Insurance/ Umbrella Policy Personal liability above and beyond coverage of auto and home policy Sold in increments of $1 million
Disability • Employer and association coverages • Private coverage • Government coverage
Disability Items to review • Occupational Definitions • Waiting Period/Elimination Period • Benefit Period
Life Term Insurance • Stated period of coverage at affordable cost • No value during or at end of term • Term Riders • •
Guarantee Insurability Convertibility
Life Permanent Insurance • Higher insurance cost with forced savings • Cash value can be borrowed or withdrawn for goals • Asset Protection
Education Planning
Education Planning • 529 Plans • Educational IRAs
Education Planning 529 Plans • Federally tax free withdrawals • Alabama resident/plan benefits • Investment Options • High Contribution limits • Control
Education Planning Alabama 529 Plan • State tax deduction for contributions and rollovers • State tax free withdrawals • Age based, static and individual funds • Low minimum contributions
Education Planning Educational IRA • Expansive education years • Income limits for contributions • Limited contributions • Little flexibility
Investments
Major Asset Classes Major Asset Class
Characteristics
Goals
Cash
Matures in less than 1 year
Capital preservation Liquidity
Bonds
Fixed income Varied maturities
Income Capital preservation
Stocks
Company ownership
Possible dividend income Capital appreciation
Avoid Market Timing Asset Class Returns (as of 12/31/16)
• •
You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to capture returns wherever they occur.
Source: Morningstar Direct
Importance of Time Horizon Growth of a Dollar, 1926–2015 (Compounded monthly) $100,000 $16,743 US Small Cap Index $5,386 US Large Cap Index
$10,000
$1,000 $135 Long-Term Govt. Bonds Index
$100 $21 Treasury Bills $13 Inflation (CPI)
$10
$1
$0 1926
1936
1946
1956
1966
1976
1986
1996
2006
The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
2015
In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. US Small Cap Index is the Fama/French US Small Cap Index; US Large Cap Index is the Fama/French US Large Cap Index; Long-Term Government Bonds Index is 20-year US Government Bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. Fama/French Data provided by Fama/French. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Past performance is no guarantee of future results.
Save for Retirement • Start early • Take advantage of employer matches • Tomorrow’s retirees will need to depend more on their own savings to fund retirement • Discuss retirement plans with your spouse
Retirement Savings Accounts Taxable Account
Employer Roth 401(k)
Pre‐Tax Employer 401(k)
Salary
$40,000
$40,000
$40,000
Pre‐tax $
$2,000
$2,000
$2,000
Tax at 25%
$500
$500
N/A
After‐tax $
$1,500
$1,500
$2,000
Employee contribution
$1,500
$1,500
$2,000
Employer match – assume 4%
N/A
$1,500
$1,600
Total contribution
$1,500
$3,000
$3,600
% of salary contributed
3.75%
7.50%
9.00%
Retirement Savings Accounts Account Balance in 30 Years $284,604
$300,000 $237,175
$250,000 $200,000 $150,000
$118,587
$100,000 $50,000 $0 Taxable Account Employer Roth Pre‐Tax Employer 401(k) 401(k) *Assume 6% annual rate of return
Retirement Savings Accounts Available After‐Tax in 30 Years $237,175
$250,000
$213,453
$200,000 $150,000
$118,587
$100,000 $50,000 $0 Taxable Account Employer Roth Pre‐Tax Employer 401(k) 401(k) *Assume 6% annual rate of return
Social Security • What age to apply? • Spousal Benefits • Survivor Benefits
Estate Planning
Estate Planning • • • •
Last Will and Testament Trusts Power of Attorney Advance Health Care Directive
Estate Planning Assets that pass by contract • Life Insurance • Retirement assets/IRAs • POD accounts • By ownership • Trust
Estate Planning Last Will and Testament • Personal Property Distribution • Remaining Asset Distribution • Trust for children • Executor • Guardian
Estate Planning Power of Attorney • Financial Decisions • Springing versus sprung
Estate Planning Advance Health Care Directive • Living Will • Health Care Proxy
What if I Die Without a Will?
If you are single ½ to mother
½ to father
What if I Die Without a Will?
If you are married with no children
First $100,000 plus ½ of the balance to the spouse
½ of the balance to parents
What if I Die Without a Will?
If you are married with children
First $50,000 plus ½ of the balance to the spouse
½ of the balance to children
Beneficiary Designations • Check beneficiary designations on qualified accounts and insurance policies
Questions?
