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Ask a Question and be a Fool for a Minute. Don’t Ask and be One for Life.

| February 12, 2013
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Can you answer the four toughest questions in your personal finances?

To live the retirement I want:

  1. How much do I need to save each year until retirement?
  2. How much rate of return do I need to earn on my savings?
  3. At what age can I stop working and retire?
  4. If my savings fall short, how much of a hit will I take to my retirement budget?

If you don’t know the answers to these questions, you’re not alone. In my experience, 9 out of 10 affluent, intelligent, motivated people can’t answer these questions. Whether you are a “do-it-yourselfer,” or work with a professional adviser, if these questions go unanswered, you are less likely to enjoy your retirement and more likely to feel anxiety along the way.

As a professional financial advisor, I answer these questions for clients using my 30 years of financial experience, and two sophisticated forecasting computer programs. The first program has about 10 key inputs and generates a “ballpark” forecast. The second program has over 100 inputs and generates a detailed forecast that shows yearly;

  • Assets, liabilities, balances, and net worth
  • Pre and after tax savings
  • After tax rate of returns by investment
  • Insurance protections
  • After tax retirement income
  • Estate values at life expectancy

To see how a simple forecast can shed some light on your goals and reduce anxiety, for the sake of this article, let’s create a hypothetical family in their early 50’s with 15 years to retirement. Their savings are in qualified plans, brokerage accounts, and home equity. Let’s assume $100,000 annual income and keep the rest of the numbers relative so we can scale the math according to any situation. We often see about 5x annual salary in savings (outside of home equity) at age 50 with an annual savings rate of approximately 7%. With a 5% annual rate of return, and inflation of 3%, this hypothetical family would accumulate about 12x annual salary at retirement. That’s approximately $1.2 million in savings plus home equity and social security – not bad right?

Well, with 3% inflation, it will take $145,000 future dollars to live a retirement lifestyle like they did when they worked. Spending an inflated $145,000 a year, less social security, the investment pool would be depleted in their mid 70’s. Not the idea outcome, but a clear picture of the situation.

So, once a family knows the numbers, what can they do if their plan doesn’t look the way they want? The obvious things are to save more, try and find higher rates of returns, and or find more efficient uses of their money which can be added to savings.

What do we mean by more efficient uses of money? Well, the biggest inefficiencies we see are consumer debt, taxes on savings and investment returns, mortgage selection, and insurances deductibles and coverage’s. It’s not uncommon for us to find 5% to 10% of a family’s annual income in inefficiencies and bring them back into their savings.

So, if you don’t know where you stand, it’s almost impossible to see your inefficiencies and creates a lot of unnecessary anxiety. If you do know where you stand, but don’t like the numbers, there are many things you can do to improve your financial future by becoming more efficient with your money.

We help clients every day by building financial forecasts, pointing out inefficient strategies, and then creating new efficient plans that help meet retirement goals.

If you’re interested in a high level financial forecast and our ideas about how to become more efficient, just give us a call. We can create a “ballpark” forecast in 30 minutes (online or in person). If you would like a detailed financial forecast with all the inefficiencies highlighted and recommendations on how to eliminate or reduce them, we’ll need your financial documents and about three hours of meeting time.

It’s just that easy to get yourself a plan and reduce financial anxiety. No therapy, no watching a Dr. TV guy, and no taking little pink pills.

Written by Mark Guthrie

Principal – Westface Financial and Insurance Services

Mark Guthrie is a Registered Representative offering Securities through The O.N. Equity Sales Company, Member FINRA/SIPC , One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794

Investment advisory services offered by Mark Guthrie through O.N. Investment Management Company.

 Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional for additional guidance regarding tax-related matters.

Disclaimer: All of the assumptions made in this article are not to be considered guarantees of any investment performance. This is written as a general informational article meant to help the reader understand basic concepts in personal finance.

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