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How would I set up a financial plan without retirement in mind?

It sounds like a lot of financial advisors focus on retirement planning. How should someone set up a financial plan when they don't know when, or if, they will ever want to retire?

Financial Planning, Retirement, Lifestage Based Planning
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February 2017

You're right, much of the financial planning industry does focus on retirement planning. That's for a good reason because once one retires, their assets and other cash flows need to replace the income they earned while working.

But your question is a good one because the concept of retirement has changed over the years. More people move into retirement gradually now and some never do retire, although they've attained an age that traditionally signifies retirement.

So to answer your question, I suggest that you budget your finances in a way so that you are constantly building your net worth. You do that by using debt for things like (reasonable) housing, transportation, and education only, but not for taking a vacation or buying holiday gifts. If you can avoid debt all together, even better, but I believe that it's OK to borrow to gain ownership of the roof over your head, your transportation to work, and the education background you need to get a job and earn income in the first place.

After paying your expenses, put something away each and every paycheck. A rule of thumb is that you should have 3 to 6 months of living expenses liquid in an emergency savings account that you can access in the event you lose your job, have a major car repair, have a major hospital bill, or aren't unable to work. Over and above that amount, you can begin to invest.

For beginners, I suggest using a simple asset allocation using low-cost ETFs. By a simple asset allocation I mean taking your age, subtracting it from 100, and the resulting number is the percentage you should have in stocks. Your age should be put into bond ETFs. This simple asset allocation I mention is very simplistic and has been debated however is a good starting point for many folks looking to get started with investing.

At this point, if you have used debt wisely and are able to comfortably make payments on it, you have built your 6 month emergency fund that is sitting in a savings account, and you have begun to invest, frankly you are on your way to 'financial success'. There's your financial plan: you are building your net worth as you are living within your means while building your assets.

But I would be remiss if I didn't add some additional comments to round out and complete this discussion even if some of what I follow with brings back the concept of retirement. I do so because there are some benefits to using retirement-oriented tools even when retirement isn't the primary goal. (It really is hard to avoid the power of retirement as it impacts financial planning in so many ways!)

The type of investment account you establish can be an IRA (Individual Retirement Account) which allows for tax-free growth of the assets in that account until they are withdrawn however IRAs have restrictions and tax penalties should you want to access the funds prior to age 59 1/2. A Roth IRA is generally more advantageous than a Traditional IRA as the proceeds of a Roth IRA are tax-free upon withdrawal whereas the growth on assets in a Traditional IRA will be taxed as current income. All things being equal, tax-free is nearly always better than just tax-deferred. But to avoid the IRA trap entirely with the various restrictions they have, just establish a 'regular' investment account. Be prepared to keep accurate and detailed records of that regular investment account as it will be taxed each and every year.

Another easy way to set money aside is through an employer-sponsored retirement account. Again, such accounts such as 401(k)s, 403(b)s, and 457s are geared toward retirement and thus subject to restrictions to get at the funds prior to age 59 1/2. However, if your employer-sponsored plan offers a match, the match represents free money to you which is a good thing and tough if not impossible to get anywhere else. So consider contributing to such a plan to the degree you can maximize your match. Many plans offer the ability to borrow against the account balance prior to retirement which is a way to access your account in a pinch albeit not optimal.

Another less used, but potentially very beneficial approach, is to set up a fully-funded cash value life insurance contract. In such an arrangement, the goal is to put as much as you can into your policy relative to the death benefit to avoid it from becoming a MEC (Modified Endowment Contract). The cash value will grow over time either at a guaranteed rate or not depending on what kind of policy used. There will be very little cash value appreciation in the early years of the policy however generally in a correctly established policy after about 8-12 years they tend to have more cash value than what has been contributed into them. That available cash value can be accessed for any reason through withdrawals or loans on a completely tax-free basis when correctly structured prior to age 59 1/2, which is very good from a financial flexibility standpoint. Unlike setting up a savings account or investment account which you can do yourself online, you will need to find a qualified broker to assist you in setting up a cash-value life insurance policy. You can't do it yourself online due to the complexity associated with the product. Also, keep in mind that unhealthy or elderly folks may not be eligible for a policy as there is an application process that everyone needs to pass. It is advisable to seek multiple quotes and illustrations through a broker who works with several different insurance companies to ensure you get set up with a policy that suits your needs well.

Last, it's essential to include the concept of protection into your financial equation as well which is what insurance does. Above, I discuss how life insurance can be used as a strategic asset, but keep in mind that it would also trigger a larger payout to your designated beneficiaries in the event of death. Critical illness insurance pays out a lump sum in the event of severe sudden onset cancer, stroke, or heart attack. Disability insurance is paycheck insurance and would kick in while or after your emergency fund is used. Long-term care insurance triggers in the event that a person cannot perform at least 2 of the 6 activities of daily living (bathing, transferring, toileting, dressing, feeding, continence). Of course, you should have adequate limits on your home and auto insurance as well, making sure that your have sufficient liability coverage which I suggest should be at minimum $250,000 but probably more like $500,000 or $1 million for just about everyone.

I hope you can take away some of the suggestions I've shared here with you to establish and build a solid financial plan that is not necessarily geared towards retirement.

February 2017
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