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Financial Planning
1. A sudden manifestation or
perception of the essential
nature or meaning of
something
Insight based experiences
result in a…
Is not always better
but, Is always different
3. 4 Sources of Income
•SSA •Own House
•Pension •Savings
4. Quick Monthly Calc
We Need $6,000
- SSA $1,500
- Pension $2,500
Still Need $2,000
Our savings will have to supplement the
still need amount, do we have enough
savings?
6. 1.- Liquid Reserves
• A reasonable person must have 3 to 6 months of
income saved somewhere in case one is out of
work or facing an emergency/opportunity for:
• Essential expenses or an opportunity to buy
something cheap, such as:
– Rent or Mortgage Payment
– Utilities
– Food
– Transportation
– Clothing
7. 11 Reasons Why People Buy Life
Insurance
1.- Transfer Of Risk to Others (Insurance Companies)
2.- Income Continuity
3.- Pay Mortgage Or Any Other Debt
4.- Funding Education For Their Children
5.- Emergency Funds
6.- Savings To Pay Estate Taxes
7.- Charities
8.- Funding Supplemental Retirement Needs
9.- Settlement of Business Buy/Sell Agreement
10.Compensate For Loss of Business Key Personnel
11.Selective Compensation Plan
And You, Have You Covered All Your Bases?
8. 2a.- Protection
• Life Insurance:
– Term: Guaranteed for 5, 10, 15, 20, 25, 30 years
– Permanent:
• Whole Life:
– Guarantees return, is the best insurance, but, the most
expensive,
– Pays Dividends, but, at very low interest
• Universal:
– Guaranteed: expensive but better return than whole life
– Fixed: Good return of investment, but, not guaranteed
– Variable: Better return yet, but, not guaranteed
9. 2b.- Protection
• Income Disability Insurance:
– How do you replace income in case of disability
due to a tragic event, like a debilitating illness, or a
catastrophic accident?
• Long Term Care:
– Sooner or Later we all face two events:
• We will die
• We will grow old and others will have to take care of us
10. 3.- Fixed Investments
• Short Term Investments, 3 to 5 Years in Length. We will
get returns, guaranteed, but, very modest
• Muni Bonds:
– Private Companies
– Governments:
• Cities
• Counties
• State
• Federal
• Bank Accounts:
– Checking
– Savings
– Certificates of Deposit
– Money Market Accounts
11. 4a.- Variable Investments
• Long Term Investments, Usually More Than 5
Years
• Mutual Funds
• Annuities:
– Fixed: Guaranteed, Modest Return
– Variables: Better Return, However, No Guarantees
– Long Term: Up to 7.25% Guaranteed Return
– Immediate: Excellent if what you seek is a long
term, defined, guaranteed income
12. 4b.- Variable Investments
• Individual Retirement Accounts (IRAs): Save
Up To $5,000 Every Year From Income Before
Taxes.
• You do pay taxes once you start using your
money to supplement your
retirement, but, not before 59 ½ years
old, and no later than your 70 ½ birthdate:
– Traditionals
– SEP
– Rollover
– Roth
15. The Rule of 72
72/Interest = # of Years to Double
the Capital
ó
72/# of Years to = Interest
Double the Capital
16. In The Future, Will Taxes Be:
A.Less?
B.The Same?
C.More?
17. $1,000,000 Is Not Forever
• As a general rule, your family will need
$1,000,000 to replace your current income of
$100,000 a year which is $60,000 after taxes
and continue with the same lifestyle you
currently provide them while you are alive and
well.
• In this scenario, it seems like the available
million dollars will last forever, or will it? If we
account for inflation we see that reality is
quite different, let us go to the table for a
visual aid:
18. $1,000,000 Is Not Forever
Year Beginning $60,000 Yearly Remaining Remaining
Capital Inflation Adjusted Capital Capital Invested
to 3% Annually to 6% Less
Taxes
1 1,000,000 60,000 940,000 996,400
2 996,400 61,800 934,600 990,676
3 990,676 63,654 927,022 982,643
4 982,643 65,564 917,080 972,104
5 972,104 67,531 904,574 958,848
6 958,848 69,556 889,292 942,649
7 942,649 71,643 871,006 923,267
8 923,267 73,792 849,474 900,443
9 900,443 76,006 824,437 873,903
10 873,903 78,286 795,616 843,353
11 843,353 80,635 762,718 808,481
12 808,481 83,054 725,427 768,953
19. $1,000,000 Is Not Forever
Year Beginning $60,000 Yearly Remaining Remaining
Capital Inflation Adjusted Capital Capital Invested
to 3% Annually to 6% Less Taxes
13 768,953 85,546 683,407 724,412
14 724,412 88,112 636,300 674,478
15 674,478 90,755 583,722 618,746
16 618,746 93,478 525,268 556,784
17 556,784 96,282 460,501 488,131
18 488,131 99,171 388,961 412,298
19 412,298 102,146 310,152 328,761
20 328,761 105,210 223,551 236,964
21 236,964 108,367 128,597 136,313
22 136,313 111,618 24,696 26,177
23 26,177 114,966 BROKE!! BROKE!!!
20. Why Didn’t Somebody Tell Me
“The Rest of The Story”?
Annual IRA/401k Contribution = $6,000 x 35 yrs = $210,000 Total Contribution
Tax Bracket (income > $50,000) = 33.3%
Tax Savings = $2,000 x 35 years = $70,000 Total Tax Savings
Net Outlay = $4,000 per year
$6,000 year @ 7.5% for 35.1 yrs = $ 1,000,000
At Age 85 $500,000 Taxes
x 7.5%
Paid in Retirement Years 75,000
VERSUS x 33.3% Tax Bracket
$70,000 Taxes Saved (-25,000) Annual Tax
During Contribution Years
= $ 50,000 Net Income
In the first 3 years of retirement, every dollar of taxes saved during 35 years of deductions was paid back. In fact,
a person living a normal life expectancy will likely pay over 10 times the taxes on a qualified retirement plan
during the retirement years than the taxes saved during the contribution years.
MF p. 237
21. Four Phases of Retirement Planning
Contribution Accumulation Withdrawal Transfer
IRA/401(k)
Tax Tax Taxed Taxed
Favored Favored
22. Four Phases of Retirement Planning
Contribution Accumulation Withdrawal Transfer
IRA/401(k)
Tax Tax Taxed Taxed
Favored Favored
Non-Qualified Alternative
After Tax Tax Tax
Tax Favored Favored Favored
23. Control Of Capital
The elements that determine if the investment is
wise and prudent are:
24. The Paradigm of Risk-Return
1. Commodities What investments pass
2. Businesses 1 the test of:
3. Limited Societies
4. Ranchs, Farms, Land
2 3 Liquidity?
5. Speculative Stocks
6. Low Quality Bonds Safety?
7. Real Estate Investments 4 5
8. High Quality Stocks
Return
9. High Grade Bonds of Interest?
6 7
10. Mutual Funds
11. Certificate of Deposits
12. Investment Grade Insurance 8 9 10
13. Money Market
14. U.S. Treasury Bills 11 12 13
15. Annuities
16. Home Equity
14 15 16
25. 3 Categories of Investment That Meet The
Liquidity, Safety And Rate Of Return Test For
Conservative Long Term Investing
Historical Rate of Return
Taxation
Annuities LIFO 5% to 9.3%
Avg. 7%
Net 5%
Investment Grade FIFO or 4.0% to 13.75%
Insurance Contracts Tax Free Avg. 8.2%
Net 7.1%
Mutual Funds Taxed as <30> to 42%
Earned Avg. 10%
Net 6.7%
26. Over the Last 70 Years of Stock Market History
You Would Have Experienced
on a 20-Year Investment
STOCKS BONDS
Best High of 20.9% 10.9%
Worst Low of 5.4% 4.7%
Average of 12.9% 7.8%
8.3% (Net after Tax)
20-30% of those years a loss is generally experienced
27. Starting With $100,000
If you were close to retirement, which Series would you
prefer?
* *
Año SERIES 1 SERIES 2
Taxable Tax Favored
1 +20% +8%
2 +21% +8%
3 +10% +8%
4 - 16% +8%
5 +12% +8%
6 - 2% +8%
7 +22% +8%
8 - 6% +8%
9 +11% +8% * + ó -
10 +15% +8%
SERIES 1 TAXABLE: value after 10 years = $215,571
SERIES 2 TAX FAVORED: value after 10 years = $215,892
28. Universal Insurance Policy
Structured like
An Investment Grade
Insurance Contract
Used like
A Non Qualified Tax Favored
Alternative Private Retirement Plan
30. Investment Grade Universal Life Insurance
Structured and Used like
A Non Qualified *Tax Favored Alternative Retirement Plan
•Tax Code: IRC Section 101, IRC Section 72(e) Rev. Rule 66-322, 1966-2 CB 123, TEFRA Section 266, DEFRA Section 221 MF p.291
31. Samples of 3 Investment Grade
Universal Life Insurance
Rate of Return 25-Year History
Required Return to
Get the Same
Guaranteed Worst Average Best Accumulation Values
Fixed 3% 5.75% 7.5% 13.75% 7.44%
Variables None <30%> 10.5% 35% 10.52%
Indexed 1% 1% 8.2% 17% 8.20%
(Connected to S&P 500)
MF p.334
32. 6 Elements of Financial
Planning
Risk Management
Taxes
Legacy
Cash
Credit
Assets
