A brief overview of financial planning

September 26, 2014

Recently, while speaking in front of a group, I was asked to give a 5-minute overview of “What is financial planning?” Well, here it is.

“Now for a quick review of what we address in the practice of financial planning:

The first area is cash flow & taxes. If you’re working, we measure cash flow, which is income minus expenses. We make recommendations regarding where the cash flow can best be invested. Usually, the first place to invest cash flow is in qualified plans – 401ks, 403bs, etc. When you invest in a qualified plan, you get an income tax deduction for your contributions, any earnings accumulate tax deferred while in the plan, and when you begin withdrawals you’re usually in a lower tax bracket. Remember if you withdraw funds prior to age 59 1/2, you may be subject to a tax penalty.

The next area we look at is investment planning. Most people still use the old method of portfolio construction – read the newspaper and guess. I stopped using that in the mid 1980s when I discovered Modern Portfolio Theory (MPT). It won a Nobel Prize in Economics in 1990 and has served us quite well. But, after the stock market crash of 2008, we learned that we could not live by MPT alone. That’s because, unlike our previous thinking, stocks and bonds acted the same way. They both crashed. Now I use a combination of MPT along with Alternative Investments, such as Real Estate Investment Trusts (REITS) and Business Development Corps.(BDCs). By the way, we are not the only ones using this concept. Any pension plan or foundation worth its salt uses the concepts found in MPT. (It is important to keep in mind that no strategy assures success or guarantees against loss. All investments involve risk and may lose value.)

Retirement planning is next and, needless to say, it’s a big one. Actually, it’s a combination of the first two concepts. We run cash flows prior to retirement to get an idea of what will be available to invest. We make investment recommendations, monitor and tweak them along the way, and annually measure if the nest egg will be sufficient to provide a comfortable retirement. Obviously, the closer you get to retirement, the less Kentucky windage is involved in the equation.

Risk management is the next concept. It’s not sexy so it’s not covered in the business shows on television. They rely on the entertainment factor of investing. But nonetheless, it’s important.

What is it? It is the identification of what can happen to you and how you handle the risks. Okay, what are your risks? Well, you can become ill or disabled, you can die, your property can be damaged or destroyed, someone can sue you or you can wind up in a nursing home with a cost that can decimate your estate. What do you do about these risks? You keep what you can handle and ship the rest off to an insurance company. We check to see if your coverage is reasonably priced and correct.

Lastly, we come to estate planning. The basics of estate planning can be found in 3 legal documents that everyone should have. Your will defines who receives your worldly goods upon your demise. Regarding taxes, there are 3 parties to an estate. They are: your heirs, the United States Government or a charity of your choice. If you have a will, you get to choose who gets what.

The second document is a durable power of attorney. This can save heartache, time, and money should you become disabled. If you do not have this document, your family will spend 6 months and $6,000 to be named as your guardian by a Superior Court judge. After spending that time and money, the judge still thinks that your guardian will steal from you and will require an annual review of income and disbursements. Also, the guardian cannot sell your house without the judge’s permission, which will devalue your house. So, you can avoid all of these problems by having a durable power of attorney.

Last, but not least, is a medical power of attorney – a living will. In order to keep your life (or more accurately your death) from becoming a circus like that of Karen Ann Quinlin and Terry Schiavo, you’ll want to have a living will. Should you go into a medical facility without a living will, you will be subject to their rules, not yours. Now, you may be happy with their criteria on respirators, feeding tubes, etc., but then again, maybe you won’t. So, to be as sure as you can that your wishes will be fulfilled, get a living will and have it reviewed periodically along with your other legal documents.”

Well, that pretty much covers financial planning.

Content in this material is for general information only and not intended to provide specific legal advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified legal advisor.

Randy Neumann, CFP® is a registered representative with and securities offered through LPL Financial. Member FINRA/SIPC. Financial planning offered through Randy Neumann & Associates, A Registered Investment Advisor and a separate entity. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.