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Build a plan


Will you be financially secure? Our worksheet will tell you.

Planning—the Key

Build a plan

Jump to:
Choose article section... Set your financial goals Identify existing resources See how far your resources will go Select appropriate investments Monitor your plan Budget worksheetModel portfolios

Will you be financially secure? Our worksheet will tell you.

By Leslie Kane
Senior Editor

Christopher Columbus set out in search of the Far East, and wound up in the Americas. You could end up way off course, too, unless you address your monetary goals now. You need a plan to follow. "Developing a financial road map will help determine your future lifestyle and make sure you don't see your dreams dissolve," says Todd Bramson, a financial adviser with Marathon Advisors in Madison, WI. "You don't want to wind up on the brink of retirement and realize you'll have to pinch pennies, just when you thought you'd be able to enjoy yourself."

Your financial plan will help you avoid such a nightmare by clarifying how much you need to invest, what return to shoot for, and how much risk you'll have to take to generate that return. In fact, minimizing risk is one of the most important functions of a financial plan. "Why put money into speculative stocks hoping for 14 percent annual return if you need only 8 percent to achieve your goals?" says Bramson. "Or if a 10 percent return won't be enough, maybe you've got to increase your savings rather than invest more aggressively."

To develop a plan that covers all aspects of your finances, including things such as estate and tax planning, it's best to enlist a professional's help. A financial planner will raise issues and present options you may not think of, answer your questions, make recommendations, even help you put your plan into action, if you'd like.

If hiring a professional isn't an option right now, though, you can still put together a simplified plan yourself. Here's how.

Set your financial goals

Start by listing your key financial objectives, such as buying a new car or house, paying off a large debt, and saving for the kids' college tuition or your retirement. Include estimated target dates.

It's helpful to separate your goals into immediate, short-term, mid-term, and long-term events. Immediate covers your emergency cash reserve—the amount needed to keep your family afloat for six to 18 months if you suddenly lose your earning power. Short-term goals include major expenses or purchases within the next five years, and mid-term goals range from five to 10 years. Long-term goals are those more than 10 years away.

You'll also have to figure the dollar amount required for each goal. Gauging your retirement income needs is the biggest challenge, because it calls for some assumptions. You'll need enough to cover 70 to 100 percent of your current living expenses, experts generally say. To be sure you have a good grasp of what those expenses total, complete the budget worksheet below or use a personal finance program such as Quicken or Microsoft Money to track your expenditures.

If you currently pay for children's schooling, piano lessons, car insurance, and the like, and the kids will be on their own by the time you retire, you may be able to live on just 70 percent or so of the amount you currently spend. But if you're already an empty nester, your expenses may not drop much in retirement—and in either case, some costs, such as those for travel and medical care, may well rise.

For goals less than three years off, you can calculate the cash you'll need without considering inflation, but for longer-term goals, it's wise to factor it in. Based on historical inflation patterns, financial planners typically assume an annual rate of about 3 percent. You can use financial calculators available online or in personal finance software to account for inflation (see "Check out the latest software").

Identify existing resources

List each of your current savings assets. Divide them into tax-deferred—IRA, 401(k), Keogh—and taxable accounts. (A Roth IRA will not be taxed.) You'll need to subtract estimated taxes from the tax-deferred accounts to figure out how much you'll actually be able to spend. Also list your "use assets"—your house, car, and vacation home—but keep them separate from your other assets, because they may or may not be available to help finance your goals. "You may want to stay in your home forever, or sell it, buy a smaller house, and tap some cash to live on or invest," says Bramson. If you've got a pension plan that will kick in, count that, too.

Also make a list of any loans or other obligations you have. You'll need to know those to calculate your net worth—total assets minus total liabilities. Checking your net worth annually will give you a good sense of how much financial progress you're making overall. If your net worth stagnates or drops from year to year, you'll know your financial plan is off track.

See how far your resources will go

The simplest way to estimate this is to plug your numbers into a personal finance software program. For instance, to calculate how big your nest egg will be by the time you retire, you'd enter your current age, your planned retirement age, the current values of your investments, projected returns, income tax rate, inflation rate, and so on. The program will do all the calculations. If you don't have such a software program, use the online calculators at www.mdtaxes.com/retire_calc/data.htm or www.newyorklife.com (click on "Planning Tools," then on "Retirement Planning"). You can use them to figure short-term saving goals as well as retirement needs. Besides calculating the appreciation potential of your current assets, figure in any additional amounts you'll save. For example, say you've got $250,000 in a 401(k). What will it be worth in 15 years with a 10 percent annualized return? If you add $10,000 a year for the next 15 years, how much will you have then? What if your return averages only 8 percent a year?

Continue experimenting with different rates of return and savings amounts until you find the combination that works best for you.

If you're not sure how to come up with the additional cash you'll need to save, revisit the budget worksheet below and look for places to cut back on spending. Refinancing to reduce the interest you pay on a mortgage or other debt may also help (see "Pare down debt").

Select appropriate investments

By now, you'll know the investment returns you'll need to fund your goals. Next, choose the mix of stock and bond holdings most likely to achieve those returns. The portfolio guidelines on this page will help.

A word of caution: Although investing aggressively can boost your returns, it also increases your risk when the market misbehaves. Many experts say it's best to invest conservatively. Keep in mind that over the past 75 years, the Standard & Poor's 500 Stock Index has returned an average of around 11 percent annually. With the preferred mix in mind, you can then select investments. Assuming you don't have the time and the knowledge to analyze and monitor individual securities, mutual funds are your best bet. To help you choose appropriate funds, check Morningstar Mutual Funds, which is likely to be available in your local library. It provides current and past mutual fund returns, each fund's investing style, and other factors that are critical to your selection. The returns and commentary provided by investing supermarkets such as Charles Schwab (www.schwab.com ) and Fidelity Investments (www.fidelity.com ) can also help.

For shorter-term goals, such as saving for a new car in, say, five years, stick with investments that don't involve significant risk, such as ultra-short and short-term bond funds (see "Energize short-term investments").

Monitor your plan

Any major life change—divorce, a steep decline in income, a new family member—will affect your plan. Review your progress annually to see if you're on target or need to make modifications. If over several years your stash fails to grow as much as you anticipated, you might want to select new investments or beef up your savings.

Remember that illness or disability due to an accident can derail your savings schedule as well as your lifestyle. Make sure you have sufficient disability insurance, so that you can stick close to your plan even if you're unable to earn an income.

Budget worksheet

To find places to snare savings, you first have to see where your money’s going.

Use this worksheet to find out. Although you may have little or no control over your current fixed expenses, you can cut down or moderate your variable expenses to free more money for savings, so take a particularly close look at those spending categories.

Monthly amount
Nondiscretionary fixed expenses
Home mortgage or rent
Other mortgage
Real estate taxes
Maintenance fees
Auto insurance
Disability insurance
Health insurance
Homeowners insurance
Life insurance
Other insurance
Dues, licenses, fees, etc.
Bank loans, other loans
Support for dependents
Nondiscretionary variable expenses
Basic clothing
Car repairs
Child care
Gas, electricity
Household repairs, maintenance
Medical care, drugs
Water, sewer, garbage collection
Discretionary expenses
Additional clothing
Beauty care
Charitable contributions
Credit card interest, fees
Household help (gardening, cleaning)
Newspapers, magazines
Optional health care
Private school



Model portfolios

Mid-term savings portfolio
Potential return: 9.7 percent annually, on average, over 5 years

50% U.S. large-cap blue chip equity funds
50% short- to medium-term domestic bonds or bond funds


Aggressive portfolio
Potential return: 12.3 percent annually, on average, over 10 years

20% small-company equity funds
20% international equity funds
30% large-company growth funds
30% large-company value funds


Moderate portfolio
Potential return: 11.3 percent annually, on average, over 10 years

15% small-company funds
15% international equity funds
25% large-company growth funds
25% large-company value funds
10% international bond funds
10% intermediate-term domestic bonds or bond funds


Conservative portfolio
Potential return: 10.3 percent annually, on average, over 10 years

30% intermediate-term domestic bonds or bond funds
20% large-company value funds
20% large-company growth funds
10% small-company funds
10% international bond funds
10% international equity funds

Source: Todd Bramson, Marathon Advisors, Madison, WI


Leslie Kane. Build a plan. Medical Economics 2001;21:10.

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