What one thing can you do today to change the course of your financial future? Having a written financial plan can dramatically increase the chances you’ll reach your retirement goals. Yet, according to Schwab, only 33% of Americans have one! A One-Page Financial Plan helps distinguish the overlap of things that are actually important and actually controllable. The “Dynamic Duo” of financial planning, Joe Anderson, CFP®, and Alan Clopine, CPA, will help you put pen to paper to create a basic written DIY financial plan.
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Important Points:
0:00 – Intro
1:34 – One-Page Financial Plan
3:11 – Crunch the Numbers
5:27 – Retire with a Million Dollars
6:41 – Retirement Budget
7:53 – Download the DIY Retirement Guide
9:20 – True/False: A Roth IRA is a type of tax-deferred source of income in retirement?
10:09 – Taxes and Inflation Impact
11:58 – Asset Location
15:48 – Download the DIY Retirement Guide
17:35 – True/False: Your time horizon is a key consideration when determining your appropriate asset allocation
18:42 – Asset Allocation by Age
20:16 – Strategy: Make Up for Lost Time
21:39 – Ask the Experts: What’s a good rule of thumb for an emergency fund?
23:30 – Pure Takeaway
23:45 – Download the DIY Retirement Guide
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Transcript:
Joe: Do you know the easiest way to accomplish your financial goals? Stick around. We are going to fill you in, folks. Welcome to the show. Show’s called Your Money, Your Wealth®, Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, president of Pure Financial Advisors, and, of course, I’m with the big man Big Al Clopine.
Al: Hey, Joe, how you doing, man?
Joe: I’m doing all right, Big Al. We’re gonna break things down even simpler today. I don’t know how we can get more simpler, but we are because the easiest way for you to accomplish any financial goal is to have a financial plan. How many of you actually have a plan in place? You’d be shocked. Only 33% of people have a written plan, and why is that? 22% of you think it’s too complicated; others, way too much stuff going on; 19%, “I don’t have enough time.” Come on. These are your financial goals. 42%, “I don’t have enough money.” That doesn’t make any sense. If you don’t have enough money, you need a financial plan to have enough money. You don’t have enough time, we’re gonna solve that for you. Too complicated, we’re gonna solve that. All of this should disappear. That’s today’s financial focus. [Pencil scratching] We’re gonna break it down to a one single-page financial plan. It’s not gonna take too much time. It’s not gonna be too complicated, and anyone with any wealth should do this. How do you start? You got to start thinking about the things that matter, what matters to you, and then you got to start thinking about the things that you can control. This is the sweet spot for your one-page financial plan. Let’s break it down. Let’s bring in the big man.
Al: So the financial plan, it can be a one-page financial plan. It doesn’t really have to be that complicated. There’s a few things you need to put in it. First of all, think about what your vision is, what your goals are, what are you trying to accomplish. Crunch the numbers. See how you’re doing. What do you need to change? Do you need to save more? Do you need to spend less? When can you retire based upon crunching the numbers? Take a look at what you have in terms of your assets. Do you have enough assets? Where are they located? Are they located in tax-deferred accounts or taxable accounts, Roth accounts? How’s your asset allocation? Do you have the right asset allocation for you. Do you have a few action items to be thinking about? These are the things that should be in your one-page financial plan, and, Joe, I think when people hear of a financial plan, they’re thinking about a big binder, and sometimes you get big binders when you go to financial advisors, but usually the things can be broken down onto a single page, I would say.
Joe: Yeah. I mean, if you want to do this yourself, you can do it on a napkin…
Al: You can. That’s right.
Joe: Right? I mean, it doesn’t have to be, you know, the 400-page bound binder that has all the complicated issues in it. I guess people get a little intimidated by that.
Al: I think so.
Joe: You know, it’s like, “Oh, I don’t want to go through that process,” but let’s break it down so you could do this yourself, so crunch the numbers. First things first is just thinking about cash flow, right, so you get your paycheck, where is the money going? Start tracking this. This is a good example, so in this example, 58% is to live, right? You got to live your life. These are, what, your needs and wants?
Al: Yeah, exactly, and, Joe, I think you also should probably have a sense of what your needs are versus your wants. It’s like a need is your mortgage payment, your rent payment, your utilities, your food, your water, things like that. A want, well, that’s a nicer car, vacation, clothes, things like that. Just be clear on that. Your needs you have to have money for. Your wants, eh, that can be a little, you know…
Joe: Subjective.
Al: subjective. Thank you. That’s the word I’m looking for.
Joe: Second is grow, right? You want to continue to save and grow your overall net worth. In this example, maybe it’s 15%. Some of you, it might be 25%. Some of you might be 5%, but just keep track of that. You want to know how much of your paycheck that you’re saving, and then you’ll owe, right, so this is your mortgage, credit card debt. Whatever mortgage balance that you have, maybe that’s 15% of your pay, and then give, some of you are charitably inclined, so maybe it’s 12%. Maybe it’s zero. It doesn’t necessarily matter. This is just a good example of the first things first of identifying where the money goes because most people, it’s like they get their paycheck, Al, and it’s like, “Well, where the heck did everything go?” right?
Al: They have no idea, and, Joe, I would say this. Some folks keep really good records in Quicken or some similar software, and if that’s you, that’s great. many of us don’t, and that’s OK, too. Just go through your checkbook. Go through your credit card statements. Maybe look at a month. Where are you spending your money? It’ll at least give you a sense. Have at least some indication how much you’re saving versus spending, how much you’re giving to charity, and so on, and then when you do that, it’s usually pretty eye-opening on things that you could potentially change.
Joe: Right. It’s super simple. It’s like, “All right. If I got a mortgage–” You know what that is, right? You get your mortgage statement. Most people don’t know this number. You just back into it, right? If you’re not saving anything and you have a lot of debt, you’re not giving, you know, anything to charity, well, living might be 90%, whatever, but just starting to get a good sense here, let’s say you have a goal of, “Hey, now I have a cash flow plan,” or, “I know where my cash is going, but now I have a goal. I want to have a million dollars before I turn age 65,” so this is crunching the numbers. It’s like, all right, well, if I’m 30, given a certain rate of return–we have a couple examples: 6%, 7%, and 8%; let’s just use right in the middle– at 30, you need to save 600 bucks a month; at 40, 1,300 bucks a month; at 50, 3,300 bucks a month because it’s like, “Oh, man, I can’t do that.” Well, I get it. Well, then maybe you won’t reach the million dollars at 65. Maybe you might reach it a little bit later. Maybe you get a windfall, something, but at least start now. Consistency is the key to make sure that you can accomplish your goal.
Al: Well, and I think one thing, Joe, that this also shows is that, because time is on your side, if you do start later, maybe you work a little bit later, and maybe you don’t even work in your job full time, but you work part time, and to beef up your savings and your investments, actually, that’s a great thing for many that haven’t saved enough in retirement. Work part time so then it’s not such a strain on your portfolio because you have some other income.
Joe: Right, and a lot of you are like, “I ain’t gonna work part time.” OK. Let’s say you’re close to retirement, so here’s your one-page financial plan. Calculate what you’re going to receive in Social Security–in this example, $32,000. All right, so I write that down. Do you have a pension? OK, $10,000, so that’s your fixed income, and then I’m gonna take a look at what do I have in retirement savings. Maybe I was lucky enough to get that million dollars by age 65, so I have that million dollars there sitting in my retirement account or brokerage account or Roth account. I just multiply that by 4%. You don’t necessarily want to take out any more than 4%. Some say 3%, depending on your age, but this is a good rule of thumb, so that’s 40 grand that I can take from my portfolio. You add all that up, 82 grand’s your number. That’s your paycheck. Can you live off of 82,000? You’re golden. If you have to spend more, well, then you have to start adjusting some things here.
Al: Well, and I think that’s right, and the sooner you can look at this, the better, right, because then you can make changes. If you’re in your 50s and you realize, “I’m not quite on track,” you can save a little bit more. You can spend a little bit less or any combination, but this is for you to figure out what you can live on so that you can retire successfully.
Joe: All right. Here’s our gift to you today, folks. Go to yourmoneyyourwealth.com. It’s our DIY Retirement Guide. There’s a lot of DIYers out there, do-it-yourselfers. You don’t necessarily need to hire an advisor. You need a plan, though. You can do it on one page. Go to our website. Download the DIY Retirement Guide. Yourmoneyyourwealth.com special offer, it’s the DIY Retirement Guide. We got to take a break. We’ll be right back.
Joe: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®, Joe Anderson and Big Al. We’re helping you break down your financial plan in one page. You need help? Go to yourmoneyyourwealth.com. Click on our special offer this week. It’s a DIY Retirement Guide, do-it-yourself retirement guide. Al, are you a big do-it-yourselfer?
Al: Uh, in some things. In other things, I’ve learned to give it over to professionals, like plumbing. I’ve tried it. I’m not gonna continue to do.
Joe: What would you do yourself?
Al: I do some gardening. I like gardening, stuff like that.
Joe: Well, that’s a hobby.
Al: Yeah. Like–
Joe: That’s not– So everything else, we’re gonna farm out, but you’re gonna do your hobby. You’re not gonna have someone else do your hobbies. I get it. That’s good. Ha ha! Go to our website. Get that DIY Retirement Guide. Let’s see how you do on the true/false question.
Al: A Roth IRA is a type of tax-deferred source of income in retirement. True or false? Well, I guess if you look at how it’s written, maybe it’s kind of semantics, but that’s a false statement because a Roth IRA is a tax-free source of income. Tax-deferred means that you will pay tax later. Tax-free means that you will not pay tax on it. You put money into a Roth IRA. You take the money out. As long as you follow the rules, then it’s tax-free. The principal is tax-free. The income is tax free. The growth is tax-free. If you pass away, your spouse gets it tax-free. If you both pass away, the kids get it tax-free. Joe, it’s a great instrument.
Joe: Yeah. I mean, tax-deferred, it does actually grow tax-deferred, but on the way out, it’s tax-free, so we would like to call that a tax-free investment versus a tax-deferred. Speaking of taxes, let’s kind of dive in. All right, so if I look historically, all right, we have equities. Total return on stocks is right around 10%, OK, so this is from 1970 to 2020. All right. 10½%, that’s pretty good. If I look at bonds, 7%. Not bad, right? Again, this is a long time frame. A lot of you are, “Oh, stocks are in the tank, and bonds–” Right, right. This is a long time frame, 10½%, 7%. You take it after inflation, right, that’s 4.6%, or–I’m sorry–this is cash at 4.6%. My return after taxes, it goes from 10.7% to 8.8%, 7% to 4%, 4½% to 2½%. After taxes and inflation, if I keep my money in cash, I’m losing money. I’m just losing money safely here, right, and all of a sudden, my stock portfolio is now performing almost like cash or bonds, so this is a huge deal. We kind of always think about this, Al, but here are some things that you can’t control in regards to taxes.
Al: Well, that’s a good point, Joe, because when you think about taxes, so first of all, stocks tend to be more tax-efficient than bonds because it’s dividends which can be qualified dividends which are taxed at capital gain rates, or when you buy a stock or mutual fund, sell it at a gain, hold it for at least a year, you get a capital gains rate, which is a better tax rate, right, so think about that. You know, another thing about this is, the tax rates when you think about cash and bonds, they tend to be higher because they produce interest income, which is ordinary income, and, Joe, a lot of people don’t realize that, so they got money in their savings account. They’re making a low interest rate, and it’s taxed at the highest of rates.
Joe: Absolutely, so let’s think about taxes here because when you look at an investment strategy, right, or a retirement income strategy, more specifically, there’s 3 different pools of money that you can actually invest your money in, right? We talked about this tax-free pool. There’s a taxable pool, and then there’s this tax-deferred pool, all right, so tax-free, taxable, and tax-deferred, so if I’m looking at tax-free, OK, that’s pretty good. That is the Roth IRA, right, or it could be municipal bonds. It could be a couple of other things. For the most part, let’s just talk about Roth IRAs, Roth 401(k)s, so if I have money here, OK, and I pull those dollars out for retirement, I don’t pay any tax–that’s ideal–but I do pay taxes going in but all of the growth 100% tax-free. My taxable account–so this could be a brokerage account; it could be, right, a capital asset, real estate things like that, anything outside of your retirement account–these are gonna be taxed from 0% to 20%. It’s a capital gains rate as long as I hold those investments for at least a year. Then we have the tax-deferred assets. This is the IRAs, the 401(k)s, 403(b)s, TSPs, everything else, right, so this is where bulk of the assets are. All of you probably have– If I were to take a percentage of where most of your wealth is, I would say you’re heavily weighted down here, and that’s fine, but you have to understand how this money’s taxed because it’s gonna be taxed at ordinary income rates. It’s the highest of these 3 taxes, so the question is, where do you want your money, OK? If I want to be diversified from an income-distribution perspective, I probably don’t want all of my eggs in this basket because then 100% of every dollar that comes out of here is gonna be taxed at ordinary income, OK, in most cases, so your tax-deferred accounts are ordinary income, the highest of rates, so you want to start thinking about, “Hey, maybe it might make sense to have some money up here and some money over here and, of course, some money here,” right, because then when I start pulling dollars to create that income stream, I can control my taxes long term, right, so how do I get money up here? Ideally, you could make a contribution if you qualify, $7,000 or 6,000 plus another thousand for catch-up, depending on your age, but you have to qualify from an income perspective. Another way that most people don’t really understand is that you could take dollars from this account here, and you can move it up here. You don’t have to be 59 1/2. You don’t have to have income. You could make a ton of income. There is no limitation, for the most part, to take these tax-deferred dollars that will forever be taxed into a pool of money that will never be taxed, OK? You do have to pay the tax when you go up into this pool, right? You got to pay a little bit of a toll, but then all of these dollars grow 100% tax-free, so start thinking about your after-tax rate of return, right, because if it’s here, my after-tax rate of return is the return I get on my investment. I never have to pay taxes here, OK? 100% taxed, 0% taxed, you make the choice, right? When you think about your one-page financial plan, taxes should be a driving force on how to stretch your money. If you haven’t saved enough, well, can I save it on the back end by not paying any tax? Less to Uncle Sam is more to me and the family, OK, so go to our website–we could break this down for you– yourmoneyyourwealth.com. Click on that DIY Retirement Guide. It’s our special gift to you. We could break down cash flow, break down tax planning, and when we get back from the break, we’re gonna talk about asset location, asset allocation, how do you invest all this stuff, and hopefully, it looks a lot cleaner than that.
Al: I hope so, although I think you did a great job, and I think, Joe, the big point here is that you can– you do have some measure of control over taxes in retirement if you will pay attention to where your money is in these pools. Get more money into the tax-free so that you can live more tax-efficiently all throughout your retirement and stretch your dollars even further.
Joe: Go to yourmoneyyourwealth.com. Click on that special offer. It’s our DIY Retirement Guide. We’ll be back in just a second. Your show is called “Your Money, Your Wealth.”
Joe: Hey, welcome back to the show. Show’s called “Your Money, Your Wealth.” Go to our website. It’s a DIY Retirement Guide today, folks. It’s a one-page financial plan. [Pencil scratching] It doesn’t have to be complicated. I don’t care how much wealth that you have. It’s not gonna take a ton of time. Go to yourmoneyyourwealth.com. Click on the DIY Retirement Guide. Everyone out there needs a financial plan. Everyone doesn’t necessarily need a financial planner. You do, however, need that plan– DIY Retirement Guide. Alan’s gonna hire a DIY golfer next week.
Al: No. I actually play golf on my own.
Joe: Oh, really? You don’t farm that out…
Al: No. No.
Joe: and then you get the score, and you go to the bar, and you can say, “Hey, I shot a 73”?
Al: I should. That would be much better score than what I get.
Joe: Ha ha ha!
Al: Ha ha ha!
Joe: Oh, boy. All right. Let’s see how you did on the true/false question.
Al: Your time horizon is a key consideration when determining your appropriate asset allocations. Well, that’s a true statement, right? Asset allocation–how much you have in stocks versus bonds or different kinds of stocks, how much you have in cash, how much you have in real estate, perhaps–anyway, yeah, the sooner you retire, right, you got to get a little bit safer, but it’s not the same for everybody, Joe, because some people that are maybe in their 70s and 80s have a very aggressive portfolio because it’s for their kids, so there’s a lot of other factors.
Joe: Right, because you got to break it down to what your goals are–what are you trying to accomplish, right, what’s the money for, right–and then you start dialing in your cash flow, OK–where’s the money going to live, where’s it going to grow, where’s it going to give, all of that we went through–and then you want to look at the taxation of how that income’s going to be taxed. Is there some strategies that you can do, right, to reduce that overall tax burden so your after-tax rate of return increases. Then you can take less risk in the portfolio–how about that for a concept? –and then we get into now the asset allocation, right, how much money you want in stocks and bonds. Maybe if you’re in the 30s, maybe it’s 100% stock portfolio. Hit my 40s, maybe I’m still 100% stock. Maybe I tone it down. Maybe I want to retire a little bit earlier. Hit my 50s, maybe that’s when I start getting a little bit more safety in the overall portfolio. This is really dependent on, like I said, your goals, right, but this is the first step, and then we take a deeper dive, Al, to figure out, all right, let’s say if you did want 100% stock portfolio, it’s not just probably one asset class. It’s multiple different types of stocks.
Al: Well, it is, and I think a lot of people get sort of stuck on it’s stock versus a bond, but there’s a lot of different flavors of stocks, right? There’s domestic. There’s international. There’s growth stocks. There’s value, small companies, medium companies. There’s emerging markets, on and on and on, and you want to make sure you have a little bit of each, so we actually recommend a globally diversified portfolio, right, so that you have a little bit of everything, and the reason is because all these different asset classes perform differently over different time horizons. Sometimes one asset class outperforms another versus another, and if you have a little bit of everything, you have a smoother ride.
Joe: Yeah, without question, so we’re not recommending anything. We’re just kind of spitballing this, Big A, right, because what we see a lot is that, OK, maybe large company growth, that’s 100% of your portfolio, all right? Well, might be OK to sprinkle a little bit more different flavors, you know, on the old ice cream cone. Let’s say now… you got your one-page financial plan, kind of scratch your head. You’re like, “Oh, gosh, what steps do I take?” What are some moves that you can make up for lost time? Because this is one reason why a lot of people don’t do a financial plan. They don’t want to see the results of it.
Al: Right, and when you look at some of the fidelity studies, they say, “Well, if you’re gonna retire at 65 or 67, maybe you should have 10 times your income, and so maybe you’re on track. You know, you take a look at– To get there, maybe you have to increase your savings to 20% if you’re only saving 10% right now–you have to crunch the numbers to figure out what that is for you–or maybe you just decide, “Maybe I can spend a little bit less in retirement, and then I may only need 8 times,” and so on, retire later. There’s different options. When you do the plan, Joe, if you’re gonna need to make some changes, the earlier you know that the better.
Joe: All this stuff is not really fun, right, but sometimes you got to take responsibility and figure out where you’re at today and what are some simple steps that you can make to make sure that you can accomplish your goals. Go to our website. Get that DIY Retirement Guide. Yourmoneyyourwealth.com, click on the DIY Retirement Guide. It’s our special offer to you free of charge. Download it right there in your computer. Let’s switch gears and go to “Ask the Experts.”
Al: What’s a good rule of thumb for an emergency fund? This is from Mary. Great question. I think we all should be thinking about emergency funds, particularly when the market takes a little bit of a tumble, as it has more recently, so here’s what you might consider–3 months to a year. That’s pretty big, I know, but the safer, the more secure your income is, you could probably do with a little bit less, right, and working for the government, salary and you have a nice pension, maybe you need less of a fund. If you have less regular income–you’re in sales or in construction–maybe you need a year. You got to figure out what’s best for you, but it is important to have an emergency fund.
Joe: Yeah, without question because sometimes we see people that have a full invested portfolio with very little cash, and then we see the opposite, where it’s a ton of cash and very little invested, right, so yes, you need to find that happy medium, what your cash reserve is, and then from there, then you want to have your investment strategy sound to accomplish your goals. All right, Big Al. What did we learn today? How do we put together this one-page financial plan?
Al: Yeah, so we all need a financial plan. It can be one page. Here’s what should be in it, so first of all, think about your vision, what’s important to you–more time with the family, want to travel more, whatever it may be for you. Have a cash flow summary, where are you spending your money just in broad brushes, not down too detailed. What are your goals? What are you trying to accomplish? When do you want to retire? What does your retirement look like, right, that sort of thing. Asset allocation, what investments do you have? Do you have the right investments to fund your goals? Where are they located–tax-deferred, tax-free, taxable? Consider that to have you a better after-tax return. Think about the action items that you need to do right now and then think about action items that you need to do later. That’s what goes into your one-page plan, and it’s something, Joe, that people should do but then review a few times a year because it changes.
Joe: Yeah, but I think the most important thing that you have to do right now is get started. Go to yourmoneyyourwealth.com. Click on that special offer. It’s our DIY Retirement Guide. DIY Retirement Guide, it’s our special offer to you today free of charge. Download it right there on our computer, and that’s it for us today. Hopefully, you enjoyed the show. For Big Al Clopine, I’m Joe Anderson. We’ll see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
