Financial Goals Current Lifestyle Chapter 9 Tools

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Financial Goals – Current Lifestyle • Clients often have trouble reconciling their long-term goals with their current lifestyle. • There is no right or wrong answer to this dilemma, but the financial planner must help the client understand the consequences of current decisions. • Quantification of long-term goals is key to understanding. Copyright 2009, The National Underwriter Company 1

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Answering the Current Lifestyle Question • Most clients do not have enough income or resources to meet all their goals. • Determining how important their current lifestyle is to them is an important part of Step 1 of the Financial Planning Process. A pie chart with allocation to various goals is an excellent tool for communication with the client. Copyright 2009, The National Underwriter Company 2

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Assigning Priorities 1. Current lifestyle 2. Children’s Education 3. Retirement funding 4. Parental issues 5. Estate Planning 6. Other special needs Copyright 2009, The National Underwriter Company 3

Financial Goals – Current Lifestyle Resource Allocation Copyright 2009, The National Underwriter Company Chapter 9 Tools & Techniques of Financial Planning This chart shows one way that a client might choose to allocate resources. It is not unusual to see clients who are devoting 90 percent of their resources to current lifestyle and almost nothing to long term goals such as Retirement, Education or Estate Planning. For many people, retirement and estate matters do not seem real to them until they are in their 50 s. 4

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Expense Allocation • In All Your Worth, Elizabeth Warren and Amelia Warren Tyagi state that people should allocate only 50% of their income to necessities, 20% to savings, and 30% to discretionary spending. * * Budget for Real Life. By: Lehoczky, Etelka. Money, Aug 2005, Vol. 34 Issue 8, p 48 A Copyright 2009, The National Underwriter Company 5

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Determining Factors in Resource Allocation • Available Resources: People who have less income allocate more to necessities • Personal Preference: – Is a 3, 000 square foot house a necessity or a luxury? – Would you rather spend time preparing food at home or eat out frequently and have more money for education? • Non-financial factors Copyright 2009, The National Underwriter Company 6

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Non-financial Factors Affecting Resource Allocation • Cultural Background: – $100, 000 wedding or $1, 000 wedding? – New car every two years or drive car until it is dead? • Family experiences: – Children of people who “lost everything. ” – Children of people who have always had great wealth. • Emotional and medical issues. • Life cycle stage and age. • Education, expertise and personal experience. Copyright 2009, The National Underwriter Company 7

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning A Football Perspective on Money “There are 5 good reasons to spend money: on necessities, on investments, on self improvement, on memories, and to impress your friends. ” Aaron Brown, former defensive end for the Kansas City Chiefs and now an office furniture salesman in Minneapolis, 1984 Copyright 2009, The National Underwriter Company 8

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Smart People Can Make Bad Choices Dan Moisand, CFP wrote in the April 2000 Financial Planning Magazine “Effective Financial Planning in the Presence of Judgmental Heuristics” that several factors affect judgment: – Mental Accounting. – Not Real Money. – Confirmation Bias. http: //www. fpanet. org/journal/articles/2000_Issues/jfp 0400 -art 15. cfm Copyright 2009, The National Underwriter Company 9

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Little Things Mean a Lot • Most people underestimate the impact of expenditures now on future income and resources • For example, passing up a breakfast at a national coffee chain (not spending $6 per day) can amount to $84, 672 over 20 years (at 6% return on investment). For an interesting article about the lack of understanding of the impact of current choices on retirement , see Boomers’ Lack of Basic Investment Knowledge Can Be Major Obstacle to Retirement Planning at https: //www. oppenheimerfunds. com/targeted. Copy/Investor. Pages/ company. News/company_news. jhtml; sessionid=KS 35 U 3 LCEY 34 HLARENVCFEQ#boomerslack Copyright 2009, The National Underwriter Company 10

Financial Goals – Current Lifestyle Chapter 9 Tools & Techniques of Financial Planning Conclusion • The client makes the decision about what is important to the client. • The planner’s job is to hold up a mirror and show the client the consequences of his or her decisions. • If the client is unhappy with the consequences, then the planner can advise on ways to improve the outcome. Copyright 2009, The National Underwriter Company 11