Personal Finance

Case Study (7):

Legacy Planning

Read the following article about Legacy Planning:

http://www.financial-planning.com/asset/article/527840/legacy-planning.html

This is the latest in the evolution of Financial Planning. It goes beyond just estate planning. As the article states "It also involves the spiritual, intellectual and ethical development of family members."

Take some time to think about this. Please comment on what you think about this and how this would be accomplished in your life. Write up a "Family Mission Statement" that pertains to your legacy.

It can be difficult to truthfully state what is actually important in your life. Most people have a idealistic view of themselves and what they believe. That is to say that they know what others want to hear or what is socially acceptable. This idealistic thought is the mission statement we want to share with everyone. As believers, the Bible clearly tells us what our mission statement should be: to bring glory to God and serve Him in all aspects of our life. If this is truly our mission statement, all our actions should reflect it.

When I read this article I could not help but see it as a marketing ploy. Not that there is anything wrong with the intent, in fact just the opposite. These folk are doing a great job of discovering who you are and what you stand for. They appear to have some great tools to get to the truth about how you got to where you are today, and what is truly important to you. This gets into marketing in my mind because there are similar methodologies to other sales/advising markets. Financial Planning comes immediately to mind. I feel like this short article had the same message as the first book we read this class, Values-Based Financial Planning (Bachrach, 2002). I think that it is a great way to do business as a professional advisor, however I wonder how much is fad and how much is real. I believe that it would be possible to tell the difference between someone who embraces this ideology and one who is just trying the next great marketing trick.

What I liked about creating a family mission statement is that those left behind, possibly many generations later, can look back at this document and understand the legacy a family intended to leave. I defined legacy as how people remember you, those things that define your life. Were we known as loving, joyful, peaceful, patient, kind, gentle, faithful, generous, hospitable and a follower of Christ? That is what I want people to remember me by, especially if anyone remembers me as a Christian. If my legacy is not positive and reflective of Christ, I would rather not be known as a Believer, because of the potential damage done to the Church. There are to many professing believers in the world who have terrible reputations.

Clearly, having a mission statement written for all to read, would help others hold me accountable for my actions. It could also redefine how some people view our family history. I come from a long line of Christians, probably eight or more generations on both sides. That is an incredible heritage, but it is possible that some time in the future I will have family members that don't know the significance of Christ in our family. If this mission statement is found it is possible that it would make someone curious enough to search for Christ themselves and find their Savior because of a simple statement.

To create my families mission statement I would like to talk to my grandparents, my parents then sit down and search the scriptures for exact references that describe successful Christian living. After reviewing what the Bible states and writing my fist draft I would share it with close friends and ask them to not only hold me accountable to the statement, but point out any deficiencies that they see in my life. Next, I would take that input and modify my mission statement as needed and then pray that God would change me to match what His plan is for my life. Since I haven't done this yet, I think I could sum it up with one verse: Mathew 22:37. “...Love the Lord out God with all your heart, and with all your soul, and with all your mind” (Holy Bible) Jesus was restating some of the message presented to the Israelites shortly after Moses refreshed their minds with the Ten Commandments. Jesus went on to say that this commandment along with loving our neighbors was a succinct statement of all the revealed Word of God, until the time He lived on earth. Any verse that can so completely sum up 4000+ years of teaching, is worth meditating on.

Resources:

Brown, C. (2006). Legacy planning. Financial-Planning.com. Retrieved August 19, 2008 from: http://www.financial-planning.com/asset/article/527840/legacy-planning.html

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Holy Bible (2006), New american standard bible: update edition. Thomas Nelson Publishing, Lockman Foundation. La Habra, Ca, USA.

Personal Finance

Case Study (6):

Long Term Investments

Compile an accurate list of all of your current long term investments. Explain the advantages of each (like matching contributions to 401plans). Now calculate the balance at age 65 assuming no changes in the amount you currently set aside. This site can help:

http://www.finance.cch.com/tools/calcs.asp#DZ06

How much is it and is it enough to retire on? What changes do you plan on making that will help you reach your goal?

Now look at other options that you may not be using. (like employee stock options, real estate) Is there a reason for/against using these options?

As I am reflecting on the current long term investments it is easy to see that I should be doing more. I have only one; a 401(k) plan through my employer. However, I am currently saving $100 each month that will be put towards a No-Load Roth IRA. In my research I found that I need $3000 to open the account, so it is a slow process. In the mean time I am investing in the 401(k) program though my employer.

The 401(k) is the only “retirement” plan through my employer. The owner gives each employee 6% of their annual salary. There is no matching; just the straight 6%. That is great, but it does not give any additional incentive to invest more as the employee. I invest an additional $87.50 each two week pay period. My current account balance is $14,743. According to a 401(k) Savings Calculator (CCH, 2008) at age 65 my balance will be $1,705,014. This calculation was using a very conservative 7% annual return and assumed that my salary would increase at a 3.5% rate each year. This includes my continued $175 monthly investment and the 6% through work.

The other investment I plan to make is the Roth IRA. Although the account is not started I have saved $1100 to date and plan to contribute $100 monthly. If I start this plan as scheduled, the account balance at retirement will be $225,477 using the same conservative 7% annual rate of return using a Roth IRA Calculator (CCH, 2008). As my income increases I plan to put additional money in to this account and start one for my wife as well. However, those plans will be left out of the analysis.

With those two investments totaling $1,930,491 at retirement. There are some variations that could be looked at, the most obvious of which is a higher rate of return. If I use the average rate of return of the S&P 500 of 11.4% (Glassman, 2008), that total would rise to $5,915,517. Getting those historic returns would be great, however according to Dent (June 2008) the next several years may not be so good. I still have 38 years to weather any storms that come my way, but it would be nice to have almost $6 million when compared to $1.9 million. Honestly I don't know what I would do with either of those sums of money. I could easily live off of 5% return each year an not have to reduce the principal.

The benefits of a 401(k) plan are threefold (CNNMoney.com 2008):

A 401(k) represents a way to reduce your taxable income since contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

This means that all my income dollars are reduced by up to $15,500 (the annual maximum) which reduced the taxes I pay today. Then the taxes that would have been removed (if it were taxed before I payed into the plan) are now earning returns for me. I do not have a benefit from the matching program, but it is still a free 6% each year for me personally. The Roth IRA has one distinct benefit as well: “the earnings on your investment are free from Federal income taxes” (Wachovia, 2008). There are several restrictions that apply, but as long as investors are working within the established guidelines, it is a great secondary investment after the 401(k).

I would like to have approximately $2 million nest egg when I retire. According to Kiplinger.com (2008), somewhere between $500,000 and $1 million is enough to cover most expenses in retirement. They were figuring in a social security check which I am not anticipating, and I want to travel internationally as much as possible.

Looking at the future, I have changed my mindset to some extent. I realize that investing to the maximum in my 401(k) is probably a good idea. I will get some additional input from my (future) financial advisor before making my final choice, but it seems like it may be better to reduce my taxable income as much as possible. I would also like to increase my contributions once I have eliminated my debt.

Resources:

CCH (2008). Financial planning toolkit. Wolters Kluwer. Retrieved August 14, 2008 from: http://www.finance.cch.com/sohoApplets/Retire401k.asp

CNNMoney.com (2008). Money: 101, lesson 23, 401(k). CNN. Retrieved August 15, 2008 from: http://money.cnn.com/magazines/moneymag/money101/lesson23/

Dent, H. S. (June 2008). H.S. Dent forecast: The economic guide for effective financial decision making. Retrieved August, 12, 2008, from www.hsdent.com

Glassman J. (2006). Why I love dividends:Dividends force managers to make the case for reinvestment. That's a very good thing. Kiplinger.com. Retrieved August 15, 2008 from: http://www.kiplinger.com/magazine/archives/2006/08/glassman.html

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Kiplinger.com (2008). The basics: How much do I need to retire? MSN Money. Retrieved August 15, 2008 from: http://moneycentral.msn.com/content/Retirementandwills/Createaplan/P142702.asp

Wachovia (2008). Tax planning: Roth IRA. Wachovia. Retrieved August 15, 2008 from: http://www.wachovia.com/personal/page/0,,505_3846_4745_4773_4778,00.html