New Year, New Plan: Putting Your Financial House in Order

Miranda Holmes, CFP®, Senior Financial Planner, First Republic Investment Management

February 13, 2015

The beginning of the year is the time many people reassess their goals, especially with regard to their finances. Goals may range from the most fundamental, such as buying a house, putting children through college, and assuring our financial independence, to the more complex, such as minimizing income taxes, managing risk, ensuring our estates pass according to our wishes, and putting a philanthropic strategy in place. To achieve any of these goals, it’s important to prioritize your needs, assess where you are and devise a series of action steps.

A Four-Step Plan

Any financial planning process begins by identifying key goals and then prioritizing them. Different factors can help you assess your priorities, including the urgency of the goal, the cost and the implications if the goal is not met.
Next, you need to determine the specifics of each goal, including timeframe and dollar amounts. The following are four hypothetical goals that an individual might set:

1. Ensure financial independence assuming retirement at age 58 with annual after-tax expenses of $200,000 per year, increasing each year with inflation, assuming a life expectancy of age 98 and a conservative return rate based on a moderate risk tolerance.

2. Put a core estate plan in place by March 31; direct assets after death of both spouses to children in trust as well as 10% to charity.

3. Purchase a vacation home by the lake within two years for $1 million; set aside $300,000 in low-risk assets for the down payment.

4. Pay for grandchildren’s’ college education, up to $150,000 per year for four years for each of five grandchildren; set aside $600,000 to meet this goal.

Now you’ll need to assess where you currently stand. Begin by creating a net worth statement listing your assets and liabilities, and while you are collecting that data, review your existing life and long-term care insurance policies, beneficiary designations and estate planning documents to see what updates are needed, if any. It’s also a good idea to create a forward-looking cash flow analysis based on your expected income and expenses, as this may give you an indication of what size investment portfolio is needed to achieve your goals. Then you can assess what action is needed to get you there. For example, if you need a $5 million portfolio beginning in four years, and you currently have $3.8 million set aside, you might need to save $50,000 per year, assuming a portfolio growth rate of 6% annually.

Finally, determine what steps you will take this year to address your goals and develop an action plan. Your plan can include priorities such as saving more money toward your financial independence fund, reviewing your investment allocation to ensure the amount of risk is appropriate for you, choosing an estate planning attorney to draft a new estate plan, setting aside cash toward a large purchase, reviewing your insurance coverage to ensure you have the proper type and amounts, and establishing and funding 529 plan savings accounts for children or grandchildren. Creating a checklist with a specific timeline also can be helpful; studies show that we are 50% more likely to achieve our goals if we have a written plan to guide us along the path.

Moving Forward With Confidence
Developing a list of priorities, assessing where you stand and devising a plan of action are things you can accomplish yourself, or you may wish to ask your First Republic advisor to guide you through the process.

Whether you do it on your own or with the assistance of a professional, you will be starting the year on the right foot, knowing you are prepared for the financial challenges ahead.

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank.   This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term.  Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document.