We tease CPAs and Tax Consultants whose stock answer is, “It depends,” when asked about a tax credit or strategy to minimize tax liability. However, as financial advisers, when we’re asked about how much one should save for retirement, how much insurance should they get, or if they should save to their 401(k) or Roth 401(k), we frequently say, “It depends on your financial plan.” But how does one come up with the plan? What is it, and where do you get one?
A financial plan comes from you. It is never too early nor too late to develop a plan. At Henssler Financial, we work with a simple, yet comprehensive planning strategy called the Ten Year Rule: Any money you need within 10 years should be invested in fixed-income securities. Any money that you will not need within 10 years should be invested in high-quality, individual common stocks or mutual funds that invest in common stocks.
Those who are living off their investments using the Ten Year Rule understand they are not pressured to sell investments when the market is down because they have 10 years of uninterrupted cash flow provided by the fixed-income portion of their portfolio. The 10 years of liquidity is also a rolling 10-year period. In 2019, you should be planning for your liquidity needs in 2029. The goal of the fixed-investment portion of your portfolio is to keep up with inflation to protect your purchasing power. If stocks are down, you have the ability to wait for the market to recover. Once the market recovers, we will then begin to replenish money withdrawn from the fixed-income side.
We implement this strategy by running cash flow projections to determine when you will need to draw upon the assets in your portfolio. We consider your life expectancy, current income, savings, taxes, and most importantly, spending. The other part of the financial plan involves insurance needs and estate planning. Your financial plan should be designed to take you from your present situation to where you want to be. We then apply the Ten Year Rule to your situation to determine if any changes need to be made so you may achieve your goals. We may also look at several different scenarios considering different variables like higher inflation, longevity, or inheritance.
Once you pick a scenario that you are most comfortable with, we then recommend purchasing fixed-income securities to cover liquidity needs and recommend the purchase of equities with any remaining funds. We also consider where you are investing, whether it is a taxable, tax-exempt, or tax-deferred account.
We also recommend that you revisit your plan every few years. Goals may change, life events may derail your plan, or you may just need to know if you are on track to meet your goals. The economy—something we cannot predict—may also change how you feel about your strategy. Ideally, having a plan in place keeps you on a steady path so that you do not overreact to market events or hype.
If you can, it is beneficial to sit with a financial adviser who can guide you through the process of organizing your finances for retirement—it is not as scary as going at it alone. Furthermore, you’ll develop a plan that is customized to your needs and goals. If you have questions regarding your financial plan, the experts at Henssler Financial will be glad to help: