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FP Explains: How to master your own financial plan for your own personal lifestyle

Most of us have no idea how much money we will need to live comfortably for the rest of our lives. Follow these steps to write a successful financial plan

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By Julie Cazzin, with Allan Norman

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DIY investors probably have no trouble researching their next investment picks and making trades, but putting together their own financial plan takes things to another level since the resources for proper financial planning are not as freely available as they are for investing.

Without proper planning, people are prone to taking shortcuts that can lead to not having enough money in retirement, having too much, or having enough but not knowing that until you’re too old to enjoy yourself.

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Consider these accepted rules: you need 70 per cent of pre-retirement income for a successful retirement; your withdrawal rate should be no more than four per cent of your retirement portfolio; and, you need to save 10 per cent of your income. Now, toss them out.

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Financial planning is about your lifestyle, so let it lead the way. Putting a plan together requires you to think of yourself first as a lifestyle planner, then a financial planner and, finally, as an adviser for investments, insurance, mortgages or whatever type of product you need to complete your plan.

The end goal, as financial adviser and author Paul Armson noted, is “to maintain and enhance your lifestyle over your lifetime, without the fear of ever running out of money, no matter what happens.”

Lifestyle planning

You can start by writing down all your expenses, which will help you identify and clarify your lifestyle. Categorize your expenses under the following headings: Properties, Living Expenses, Lifestyle (recreation, vehicles, vacation), Family, Career and Financial.

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Will any of those expenses change over time? For example, travel may increase or decrease in retirement. Household expenses often remain the same. Taxes usually decrease in retirement. Will a property be sold at some point? You get the idea.

Writing down your expenses will help you identify and clarify your lifestyle.
Writing down your expenses will help you identify and clarify your lifestyle. Photo by Getty Images/iStockphoto

Don’t take a shortcut and assume you will need $100,000 after tax in retirement, or some other figure. You’re cheating yourself from getting a true understanding of how your money relates to your lifestyle, and the results won’t be accurate, which may inhibit your decision-making.

Financial planning

Draw two columns on a piece of paper, and then list your assets on one side and your liabilities on the other. Total the two columns separately. Subtract your total liabilities from your total assets and you will have your net worth — hopefully, it’s a positive number — and then ask some more questions.

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Are you comfortable with your level of debt in relation to your assets? What percentage of your assets are in your home versus liquid assets, such as tax-free savings account (TFSA), registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), and cash? Are you going to be dependent on the sale of a property or business, or an inheritance to fund your retirement?

Make it a habit to update your net-worth statement once a year and compare it to previous years. It is a good measure of progress.

Make it a habit to update your net-worth statement once a year and compare it to previous years.
Make it a habit to update your net-worth statement once a year and compare it to previous years. Photo by Getty Images/iStockphoto

Next, review your income and expenses. Are you like most people and have a good sense of your bill payments, but not your discretionary spending? Are you cash-flow positive or negative?

Use a tax calculator to find your marginal tax rate. Your tax rate is going to dictate the benefit of RRSP contributions, and who should make them if you have a spouse. If you are a senior, your tax rate will lead you to your withdrawal strategy.

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Do a Google search to see what government credits and benefits are available to you at your current age and family situation. Is there anything you can do to maximize the credits and benefits?

Financial adviser

Project your current situation into the future and examine your net worth, cash flow and tax over time. This will allow you to strategize today to meet any future obstacles.

Once you have your plan, you will want to stress test it by changing the assumptions and checking for life, disability, critical-illness and/or long-term care insurance needs.

Then, check your final estate, taxes due and the distribution of your assets to beneficiaries. Use this as a reminder to check your will and powers of attorney.

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Once you have thought through and created your plan, create a to-do list and start implementing what needs to be done to meet your objectives. Even a small step each week will bring you closer to a full financial plan in a few weeks.

Finally, a word of caution. A one-time plan can be dangerous. A plan needs to be redone every year. Annual planning keeps your assumptions honest and builds confidence in your numbers and future projections, which should take away any worries you may have as well as open up other opportunities.

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Remember, a plan is always a work in progress and is never complete. Everything changes: people, goals, technology. As author and motivational speaker Jim Rohn said, “It is the set of the sails, not the direction of the wind that determines which way we will go.”

The value in the plan is the thinking you put into it and the learning you get out of it. This holds true even if you are working with a planner. If you want to learn, be involved in the planning rather than accepting explanations of the results.

Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca.

This commentary is provided as a general source of information and is intended for Canadian residents only.

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