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Essentials of financial planning

Financial planning important and complicated. One has to be prepared to meet all current liabilities and unexpected expenses and save for an uncertain future is a daunting task indeed till one sits down to do some solid thinking. If one won’t do financial planning, one is courting disaster when one is least capable of dealing with it – post-retirement.

Financial planning is complex but is certainly doable and an absolute necessity if one wants to live a reasonably comfortable post-retirement life. Most Financial planning consultants, whether a company or a freelancer, generally gives a complimentary goal setting meeting to help one to set a feasible financial goal. One may have to go through a few meetings before finding a planner with whom one is comfortable and the confidence to discuss matters financial. During the goal setting the financial planning consultant would need a lot of information about one’s present financial position regarding earnings, savings, job, employer, present age and the age at which one plans to retire, and one’s aspirations in short, medium and long terms and post-retirement. After the goals are determined a scheme of financial behavior is drawn up. Whatever goals and means to achieve them one has chalked out with the financial planner is at best a hypothetical scenario. It is highly unlikely that events would unfurl as planned. Life itself and everything in it is, at best, uncertain. Hence these plans need to be monitored and tweaked periodically. That is where it is important that the financial planner has your trust and confidence in him. In spite of all what one can do there are certainly enough chances for the best plans to go warily as the performance of all savings depends on a fickle financial market. With an expert on one’s side, things can always be salvaged.

The earlier one starts saving longer time is there for the money to grow and one has longer span to save more too. It is not enough to save money; one has to make sure the money works as hard or harder than one has, and spawn more.
There are two types of saving. In one, whatever money one is putting in savings is before any tax is deducted or paid. This is tax-deferred saving schemes. Most employers operate saving schemes which fall under 401(k) of the tax schedule of IRS. The money that is used to save is deducted from the earnings before taxes are deducted. In other words, the money saved and the gains it has made had not been taxed. One will have to pay tax as prescribed by law when one starts to withdraw from that.

The other scheme is called Roth 401(k), and in this, the saving is contributed from the earnings after tax is deducted and within certain limits. One does not need to pay any tax on the withdrawals from these savings with certain constraints. There is much to commend for the through the salary saving root as the savings will not ever be missed. Most employers contribute a percentage of the employee’s contribution to 401(k), some even match the employee’s. The saving thus made needs to be augmented periodically to compensate for the cost of living inflation. Companies have schemes to do this automatically, and it is better an employee opt for the same for evident benefits. Otherwise one can do it manually at certain easy to remember dates to ensure that the enhancements are not missed.

The financial planning adviser would advise on the types and amount of investments to be made. It would be a mix of bonds, securities, and equities to reduce the impact of market volatilities. The goals would need to change as many of the earlier ones would have been achieved. Some would have lost their relevance as the circumstance changed and the composition of the mix needs to change to suit the changed goals too.

As one progresses towards retirement, the goal would be to set up retirement funds and to take care of the post-retirement scheme of things. Quite a bit of investment would shift to Target Date and other Retirement Funds. There are many funds, and the financial adviser would choose the best that would meet the set goals. Some consultants even suggest that the individual, a year or two away from retirement should enact the living of their post-retirement life living within the withdrawal limits from retirement funds to avoid tax on the withdrawals.

If one starts early, distinguish between want and necessity and makes saving a priority and maximizes it and invest judiciously as per the advice of expert financial planners it is only within the realms of reasonable possibility to expect and enjoy a comfortable, relaxed retired life.

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