Financial Planning

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Brief description of financial needs and solution that are both effective and efficient

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Financial Planning

  1. 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
  2. 2. Financial Planning 4 Reasons Why Plan For The Future
  3. 3. 4 Sources of Income •SSA •Own House •Pension •Savings
  4. 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?
  5. 5. 4 Reasons • Liquid Protection Reserves •Fixed •Variable Investments Investments
  6. 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. 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. 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. 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. 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. 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. 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
  13. 13. 4c.- Variable Investments • 401k (Private Companies) • 503b (Non Profits) • Investment Grade Insurance Policies • Stocks • Residential Real Estate • Comercial Real Estate
  14. 14. The Miracle of Compound Interest 1 $0.01 16 $327.68 2 $0.02 17 $655.36 3 $0.04 18 $1,310.72 4 $0.08 19 $2,621.44 5 $0.16 20 $5,424.88 6 $0.32 21 $10,485.76 7 $0.64 22 $20,971.52 8 $1.28 23 $41,943.04 9 $2.56 24 $83,886.08 10 $5.12 25 $167,772.16 11 $10.24 26 $335,544.32 12 $20.48 27 $671,088.64 13 $40.96 28 $1,342,177.28 14 $81.92 29 $2,684,354.66 15 $163.84 30 $5,368,709.12 31 $10,737,418.24
  15. 15. The Rule of 72 72/Interest = # of Years to Double the Capital ó 72/# of Years to = Interest Double the Capital
  16. 16. In The Future, Will Taxes Be: A.Less? B.The Same? C.More?
  17. 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. 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. 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. 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. 21. Four Phases of Retirement Planning Contribution Accumulation Withdrawal Transfer IRA/401(k) Tax Tax Taxed Taxed Favored Favored
  22. 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. 23. Control Of Capital The elements that determine if the investment is wise and prudent are:
  24. 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. 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. 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. 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. 28. Universal Insurance Policy Structured like An Investment Grade Insurance Contract Used like A Non Qualified Tax Favored Alternative Private Retirement Plan
  29. 29. What is the Secret? IRC (Tax Code)
  30. 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. 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. 32. 6 Elements of Financial Planning Risk Management Taxes Legacy Cash Credit Assets
  33. 33. PLAN YOUR FUTURE I Want To Be Here Tomorrow I am Here Today
  34. 34. Control Of Capital The elements that determine if the investment is wise and prudent are:
  35. 35. Control of Capital “An idea whose time has come is more powerful than all the armies of the world.” - Victor Hugo

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