1 Page Financial Plan
A One Page Financial Plan?
Gerald House MSM
“The
Contrarian Investor”
Is a full-blown financial plan necessary? What are you getting for the money invested
in a comprehensive financial plan costing
$2500-$5000? Comprehensive financial
planning begins by organizing your financial
data and inputting that data into an expensive financial planning software
tool. Once the software has worked its
magic, the financial planner reviews the analysis. Finally, the financial planner interprets and
explains the results to the client. This
method, at first blush, sounds like a very professional process. However, the
devil is in the details.
The 5 False Assumptions
Have you ever heard the saying “garbage in garbage out”? Computer software can only analyze the data
inputted. In a typical financial plan, much of the data is erroneous because it
is analogous to guessing. Financial
planners use proposals to construct an investment
portfolio for your retirement. However,
these plans are based on false
assumptions and speculations. Let’s
review a few of the most common assumptions:
1. The stock market will
produce returns around 7%-8% annually.
2. The average annual inflation
rate is 2-3%.
3. Income taxes will be less
in retirement because you will be in a lower tax bracket.
4. You only need to plan for 20 years of retirement.
5. Once you retire, you start drawing down your assets by
4% per year to meet your living standards.
The first assumption does not take into consideration the fees
associated with investing. The actual
historical stock market returns, after fees,
is only 2%-4% (Blanchett, Finke, & Pfau, 2017). The average annual inflation rate has
historically been between 2%-3%, however; forecasting historical inflation rates
into the future is akin to assuming my eight-track
tapes from my teenage years will last forever.
Another ludicrous assumption is guessing about future tax rates. First, I
do not plan to be poor when I retire. Secondly,
most retirees find themselves in the same or higher tax bracket after they
retire. As far as only planning for a
retirement lasting 20 years, someone forgot to mention that people are living
longer and will need to depend on retirement assets long after 20 years. The last assumption assumes individual
retirees have a pot of gold waiting for them once they retire. The truth is, according to the U.S. Accountability
Office (2015), only 48% of households had some form of retirement assets
set-aside with a median value of $109,000. The math does not lie:
How long will a modest savings of $250,000 support a retiree if their
annual income needs for living expenses are $55,000 a year?
$250,000/$55,000 = 4.55 years.
Using the assumption that retirees should draw down their savings
and investment by 4% a year only yields a first year $10,000 annual
income. How will the retiree above live off
$10,000 annually if they need $55,000? If
we add a modest $1200 per month Social Security to the annual income
calculations, we still fall short of meeting the needs of the retiree by
$30,600.
“Plans let the past drive
the future.”
Change your mindset—change your life!
Get out of the “Matrix”
where you have been brainwashed into
thinking illogically about your finances for years. Come back to the real world. Start thinking about building cash flow from your investments, not stockpiling
money for some mythical retirement in the future. However, be vigilant and avoid the “agent
Johnsons” who will try to get you to sip the same Kool-Aid you have been exposed to in the past and pull you back
into the “Matrix.”
Work on building “cash flow.”
Most people live off the income that comes in from work or
investment efforts every month—good or bad.
Therefore, doesn’t it seem reasonable that we work on creating cash flow
now so it will continue to grow and provide a prosperous income for us during
our lifetime? I know what my income needs
are every month. Therefore, I will work
to create an income stream which will satisfy my needs now—not some distant
future.
Very
Few people build cash flow into their investments to support and meet their
basic needs and lifestyle. Start thinking about building
cash flow so you can have a satisfying and fulfilling lifestyle. In the end, what is financial independence? Do not be deceived, creating a lifestyle for
retirement is not about the asset value of your portfolio—it is about “Cash
Flow.”
I
may own 1000 acres of raw land valued at 3 million dollars but unless I want to
be a farmer—it will not produce any income for me until I sell it.
There
are plenty of valuable assets, however; which assets will help me put food on
the table today? Start building a cash flow income stream and forego plowing
money into a retirement account designated for the future.
Live now—not in the future.
The
One Page Financial Plan
Is
there a simple one-page document which can drive your entire financial well-being? Yes, it is called a summarized “personal financial
statement.” A summarized version of a personal financial
statement can serve as a day to day tool to track your financial progress. Accountants
use standardized worksheets designed to monitor
and present the financial position of an individual or business. Why not use these time-tested methods for our
financial plan? A personal financial
statement allows an individual to know how well they are producing cash flow, how
they are doing attaining assets, and how well they have performed financially
over previous years by tracking income and expenses. Bankers also require individuals to use
standardized forms including a personal financial statement when applying for a
loan. The U.S. Small Business
Administration (SBA) has gone so far as to name their personal financial statement form 413. Therefore, let’s keep it simple and use a
personal financial statement and forego the expensive financial plan which is
full of assumptions about the future.
Summary
A detailed analysis of the comprehensive financial plan reveals the weaknesses of this product. There are too many assumptions and false
speculations used in typical financial plans
to obtain any credible value from it. A one-page
summarized personal financial statement is a much better tool for tracking your
financial progress. Additionally, building
cash flow today is a much better approach to financial planning. Financial independence is not having to work
to provide your basic financial needs.
Achieving financial independence requires building cash flow investments
capable of meeting or exceeding your financial obligations.
Financial planners provide a valuable service to their
clients. However, a make-over of the
financial service practice is needed.
The first item to eliminate is a
comprehensive financial plan. Secondly, the typical stockpiling assets
approach needs to change to building cash flow.
Finally, financial planners should consider adding alternative
investment products and strategies to their client’s investment
portfolios.
Gerald House
References
United
States., Government Accountability Office, GAO-15-419 Retirement Savings.
(2015). Retirement security, most households approaching retirement have low savings: Report to the Ranking Member,
Subcommittee on Primary Health and Retirement Security, Committee on Health,
Education, Labor, and Pensions, U.S. Senate 1-51. Washington, DC: United
States Government Accountability Office.
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