Professional Documents
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Financial planning
From Bogleheads
A financial plan is not about amassing piles of
I Need A Plan?
money. It's a long-term process of managing your
If you don't know where you are going, you'll end up someplace else.
finances so you can achieve your goals and
Yogi Berra
dreams, while at the same time negotiating the
financial barriers that inevitably arise in every stage
of life. Remember, financial planning is a process, not a product.[1]
A sound financial plan incorporates these steps:[1]
1.
2.
3.
4.
5.
6.
Establish Goals
Gather Data
Analyze & Evaluate Your Financial Status
Develop a Plan
Implement the Plan
Monitor the Plan & Make Necessary Adjustments
Contents
1 Establish goals and gather data
2 Analyze and evaluate your financial status
3 Develop a plan
4 Implement the plan
5 Monitor the plan & make necessary adjustments
6 Notes
7 See also
8 References
9 External links
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Develop a plan
Main articles: Household budgeting; Investment policy statement
Make a list of things to do:
1.
2.
3.
4.
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year. Next, look at any pensions or social security benefits that will provide a source of income. If a pension
provides $30,000 per year and social security provides an additional $20,000 per year, then your portfolio would
need to provide an extra $50,000 each year. To prevent running out of money, you should probably start by
withdrawing 4% a year or less with an annual inflation adjustment. To generate $50,000 per year at 4% requires a
minimum portfolio size of $1,250,000. How close are you to your goal?
Turning to ABILITY, this relates to your ability to withstand the ups and downs of the market without getting
nervous and making changes to your asset allocation. Selling in the face of a decline is about the worst thing you can
do. Here is a table offered by author Larry Swedroe, based on the 1970s bear market, showing the amount of
decline for various stock/bond allocations:
Asset Allocation % Exposure to
(Stock/Bond)
Maximum Loss
20/80
5%
30/70
10%
40/60
15%
50/50
20%
60/40
25%
70/30
30%
80/20
35%
90/10
40%
100/0
50%
For example, you would be willing to accept a loss of 35% in your portfolio if you held an allocation of (80% stocks
/ 20% bonds). This table is from the 1970's; performance during other time periods will have different results. The
general idea is to select an asset allocation you are comfortable with.
4. After designing an appropriate asset allocation for an investment portfolio, one needs to execute a
disciplined savings program (if one is accumulating wealth) for continually funding the investment plan, or a
reasonable spending program (if one is drawing from the portfolio during retirement).[footnotes 2]
5. All of these investment decisions should be formalized in an Investment Policy Statement (IPS) or Investment
plan.
Execute needed estate planning documents.
Notes
1. Investment authorities commonly advise investors with goals coming due within five years to restrict investments to
short term instruments such as bank CDs, money market funds, and short term treasury securities that all mature by the
time the funds are needed. Longer term goals can include asset classes that fluctuate in price.
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2. This table from the Phau paper provides guidance on savings rates for accumulating adequate retirement savings. Pfau,
Wade D. Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle
(http://www.fpanet.org/journal/CurrentIssue/TableofContents/SafeSavingsRates/), Journal of Financial Planning, May 2011.
Retrieved 5 August, 2012.
See Replacement rate models of retirement spending for more information about replacement rate.
See also
Financial planner
References
1. 1.0 1.1 What is Financial Planning? (http://www.fpanet.org/WhatisFinancialPlanning/), by the Financial Planning
Association (http://www.fpanet.org/)
2. 2.0 2.1 Creating a Financial Plan from finiki, the Canadian financial Wiki (http://www.finiki.org/wiki/Main_Page). Modified
for US.
3. Investment Planning (http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6211), by forum member Laura.
External links
Pfau, Wade D. Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle
(http://www.fpanet.org/journal/CurrentIssue/TableofContents/SafeSavingsRates/), Journal of Financial
Planning, May 2011. Retrieved 5 August, 2012
Investment Planning: The Basics - 360 Degrees of Financial Literacy
(http://www.360financialliteracy.org/Topics/Investor-Education/Investing-Basics/Investment-Planning-The-Basics),
from The American Institute of Certified Public Accountants (http://www.360financialliteracy.org/)
Smart Financial Living: A Guide to Getting Started (http://individual.troweprice.com/public/Retail/Planning-&Research/Tools-&-Resources/Investment-Planning/Smart-Financial-Living), from T. Rowe Price
(http://corporate.troweprice.com/ccw/home.do)
What is Financial Planning? (http://www.fpanet.org/WhatisFinancialPlanning/), by the Financial Planning Association
(http://www.fpanet.org/).
Starting Your Financial Plan: A Beginner's Road Map
(http://www.fpanet.org/FinancialPlanningforYoungProfessionals/), by the Financial Planning Association
(http://www.fpanet.org/).
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