What are the seven principles of financial planning?
Each of the seven principles represents a different part of your financial life that, together, can show you where you are now, help you identify where you want to be, and provide a road map for how to get there. Let’s look at how you can apply six of these principles to help you plan for the seventh—retirement.
1 Education planning and other financial goals
Retirement probably isn’t the only thing you’re saving for. You might also be trying to save for your children’s or grandchildren’s education or a new home. So you’ll have to decide how much you can afford to put toward your retirement and your other goals based on your current cash flow and budget. Questions to consider include:
- What’s your top financial priority?
- Could you alter your timeframe (buy a home in five years instead of three)?
- Could you cut down on certain expenses to free up more money for your goals?
2 General principles: cash flow and budgeting
Additionally, your spending in retirement will have the greatest impact on your future savings—the higher your expected expenses, the more money you’ll need to save now. Making a list of your potential expenses can help you estimate your future spending. Be sure to include:
- Daily living expenses—Utilities, groceries, and mortgage or rent
- Lifestyle expenses—Travel, entertainment, and dining out
- Ongoing expenses—Home maintenance, property taxes, and insurance
3 Insurance planning
Insurance helps protect you, your loved ones, and the life that you’ve worked so hard to build. As your retirement nears, you may want to look into:
- Medigap/Medicare Advantage plans—Healthcare is one of the biggest expenses you may face in retirement, and Medicare doesn’t cover everything. Your insurance agent or financial professional can help you decide the best way to fill the gap.
- Long-term care insurance—About 60% of Americans will need assistance with daily activities at some point in their lives.1 One way you can help pay for this care is with long-term care insurance, but the premiums can be expensive. So you’ll want to do your homework and consider all your options. An insurance agent or financial professional can help you with this, too.
4 Tax planning
How you choose to save for retirement determines whether your money will be taxed now or later. Ultimately, you want the best combination of tax-deferred, tax-free, and taxable savings that will help keep more of your money working for you to and through retirement.
5 Investment allocation
As you get older, you’ll likely want to keep more of your money in less risky investments, such as cash and bonds. But it’s important to keep a portion of your savings in stocks or other investments that have the potential to grow to help protect against inflation risk. How great is this risk? A $100 bag of groceries in 1991 now costs $225.322—that’s more than double the cost. So the money in your bank account won’t go as far as it used to. Once again, you may want to work with a financial professional to create an investment mix (asset allocation) that can help you manage inflation now and in retirement.
6 Estate planning
Estate planning should be a key part of your financial plan as life can change in an instant. Your estate plan lets your loved ones know what they should do in the event you can’t make decisions about your health, your children, or your belongings due to your illness or death. Important components include:
- Life insurance
- Wills and living wills
- Powers of attorney
- Letters of instruction and health proxies
One financial life—many parts
Looking at your complete financial life can help provide a clearer picture of how much you need to save for retirement, as well as how you should save to help you reach your goals. The seven principles of financial planning can help you paint this picture—and so can working with a financial professional you trust.
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The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.
Neither asset allocation nor diversification guarantees a profit or protects against a loss. An asset allocation investment option may not be appropriate for all participants, particularly those interested in directing their own investments.