man and woman embracing and looking off into the distance with a smile knowing they have a solid personal financial plan

You Need to build a Solid Personal Financial Plan

Financial Freedom is not about having a lot of money.  Because we all know people with lots of money that don’t seem very free.  Accordingly, financial Freedom is achieved by living within your means.  That is, financial Freedom is living stress-free.  To achieve Financial Freedom you need to build a solid personal financial plan and then have the discipline to stick with it.  Therefore the sooner you begin, the greater the likelihood of success.  So let’s get started!


Step one in building a solid personal financial plan

  •  Personal Savings; we will need more than ever before in preparing for retirement; our day of “Freedom”
    • we will live longer in retirement than in the past
    • we want a higher standard of living in retirement than in the past
    • medical costs have exploded and we have to cover more of it ourselves due to high deductibles
      • medicare which kicks in at age 65 can reduce this burden but there are added premiums if your income exceeds certain levels called IRMAA which can add $5,000 per person, per year
  •  Employer Plans; always maximize your 401K contributions and employer match
  •  Real Estate; don’t count equity unless you plan to cash out and DON’T add debt
  •  Keep Working;
    • stay with your current employer on a part-time basis in a reduced role or,
    • consultancy with your current employer or others in the industry
    • working from age 65 to 70 at 80% of pay will add 25% to your lifetime retirement income

Analyze Spending, Build a Budget, Discipline

Step two in building your solid personal financial plan

  • The easiest, most effective approach is with financial software such as Quicken which will capture your financial data going forward
  • You need five years of data in order to judge how much you’ll need in retirement
    • ideally, you are starting seven years before your target “Freedom” date, but if not…
  • You may need to go back through your checking and credit card statements to fill in the gap
    • most financial institutions  will allow you to download transactions so you can organize them
    • summarize your expenditures in less than 20 categories, Quicken can handle more but you should summarize that information into the 20 categories you used to gather history from 
  •  Analyze your spending year-over-year, write a report to yourself explaining fluctuations
  •  Now build your budget; in Quicken this is super easy.  Explain budget variances as well
  •  Tighten up your spending; focus on your needs and really scrutinize your wants

Evaluate Your Assets and Liabilities

step three in building your solid personal financial plan

  •  Aggregate your cash and brokerage accounts into a Liquid Assets Category
    • these are accounts you can access freely without penalty and are liquid
  •  Aggregate your tax-advantaged accounts such as IRA, 401K, 401K-rollover
    • you don’t want to draw on these until you are required at age 70 and 1/2
  •  Aggregate your ill-liquid assets such as your home, your business and any partnerships
  •  Aggregate your long-term debt such as home mortgage or installment notes for the business

What’s Your Number

Step four in building a solid personal financial plan

  •  Schedule your annual expenses by line item until age 70, thereafter summarize them in 5-year blocks
  •  Next drop in your expected annual social security benefits until age 70, and thereafter in 5-year blocks
    • you should establish your account on the Social Security Website, My Social Security,your account will reflect the expected monthly benefit you should receive depending upon when you file 
    • try Maximize My Social Security for an amazing tool that will help you understand the right strategy
  •  Drop in expected annual pension receipts and any other receipts from annuities and the like
  •  Beginning at age 71 drop in Required Minimum Distributions for your tax-advantaged accounts.  Use Charles Schwab RMD Calculator which will give you an estimate of the required annual amounts
  • Compare the outflows to the in-flows (which will likely be net outflows).  
    • Take the largest annual net outflow after the age of 71 and divide it by .04 (4.0%).  
    • Add to this amount the cumulative outflows from the year of Freedom to age 71.
    • Add the outstanding long-term debt; you’re not going to want these after Freedom Day
    • This is your number.  This is what you need in cash and in the brokerage account in order to live in the lifestyle you have grown accustomed.

Living Trust, Wills, and Insurance

step five in building your solid personal financial plan

  •  You should have a living trust prepared by an estate attorney regardless of the value of your assets
    • avoid lengthy and costly probate court which often results in families being torn apart
    • the kindest gesture you can make to your loved ones
    • will likely include an advance medical directive as to what extraordinary steps want to be taken to keep you alive
    • not actually setting up a trust in the usual sense
  •  Don’t include your tax-advantaged accounts in the trust if you can declare the beneficiaries; this way the beneficiaries can enjoy the same tax advantages you had while holding the accounts; consult with your attorney
  •  Insurance policies and bank accounts may also be excluded from the trust but you must keep the listed beneficiaries current and you won’t be able to pass on to future generations; consult with your attorney
  •  Review your insurance policies.  Consider whether you still need to be paying for your term policies.  Consider converting your other policies into “paid-up” policies, eliminating future premiums.
You need to build a solid personal financial plan; so get 

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