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- Addressing Financial Planning Issues - Back to Basics
- 11 Financial Resolutions for 2011
- Midyear Review
- The Retirement Risk You Didn't Realize
- A Retirement Savings Tool You Might Be Missing
- Planning for a Long Retirement
- Roth IRA Conversions - a Golden Opportunity
- Demystifying IRA Distributions
- Simplifying Retirement
- Plan Today for Retirement Tomorrow
- Managing Your Cash Flow in Retirement
- Budgeting to Retire
- Investment Risk - There's No Escaping It!
- Lessons Learned from the Market
- The Folly of Market Timing
- Dollar Cost Averaging
- Budgeting the College Lifestyle
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The Planning Process: Five Essential Steps
To navigate the road to retirement, you must first map out your destination. When do you plan to retire? How old will you be? Where will you be living? What does retirement mean to you? How much will you need? Saying you'd like a "comfortable" retirement is not detailed enough for planning realistic goals: actual dollar figures are a must.
What is your current and expected financial situation?
Your financial situation is unique, so an accurate assessment becomes key to a successful plan. Our Simple Retirement Planning Calculator can help you evaluate your personal situation and help you plan for retirement. With your estimated time-frame and requirements, the calculator can provide you with an estimate of your financial situation and help you determine what actions or changes you need to make to help achieve the retirement you desire.
Will your resources meet your retirement objectives?
To determine if you have in place today what you'll need to live off of tomorrow, use our Retirement Savings Calculator. In addition to projecting the amount of money you'll need once you've retired, it will tell you what you might need to start saving today.
Did you discover a retirement savings gap? Well, you're not alone. Here's what you can do:
- Retire later
- Retire on less income
- Save more now
- Increase the rate of return on investments
For many, the first two options may be unacceptable. And for others, the last two might seem impossible, but with some advance planning and discipline, you can work toward meeting your financial goals.
A good understanding of your financial goals, priorities and personality can help you develop an investment style. Three factors are key: your risk tolerance, time horizon and tax liability.
What's your tolerance for risk? Your attitude will help dictate the types of investments suited to your situation -- and your personality. For example, some people can't sleep at night if they believe their investments may lose value. Yet others are comfortable with investments that may be volatile but also have the potential for aggressive growth.
Financial planners frequently use five categories to define risk tolerance:
- Conservative income-oriented investors seek to preserve principal above all else, with asset growth a secondary priority.
- Moderate income-oriented investors seek to generate and maintain steady income at the expense of little, if any, asset growth.
- Conservative growth-oriented investors seek to increase portfolio value while producing a moderate amount of income.
- Moderate growth-oriented investors seek to grow assets and income while tolerating moderate fluctuations in value.
- Aggressive growth-oriented investors seek to maximize returns while tolerating a high fluctuation in asset value.
How much time do you have before you'll need to draw on your savings? Your answer will help determine which investment vehicles are most appropriate. Generally speaking, the longer you have until retirement, the more you should invest in growth securities. As you draw closer to retirement, most advisors suggest shifting a larger portion of your portfolio into more conservative investments.
Some specialists suggest this rule of thumb: the percentage of your investments in growth securities should be equal to 100 minus your age.
Finally, your tax situation will influence the allocation of assets. For instance, should you consider tax-free or tax-deferred income? Do you expect your tax bracket to increase or decrease? Your answers will dictate where you should invest at least a portion of your portfolio.
Generally, investments can be divided into two broad categories:
Equities, such as corporate stocks, are investments in which you own a share of the investment. They can fluctuate in value.
Fixed-income investments, such as corporate and government bonds, in which you loan funds to a corporation or government entity, with a fixed payback as your return.
While the investment categories you select should be based on your time horizon and tax situation, the most crucial factors to consider are your financial objectives and risk tolerance.
Once you've reviewed your investment options, you need to design a plan that will help you meet your financial objectives and needs, the income shortfall (or, if you're lucky, surplus) you project, and specific investments that will fill the income gap.
A Word About Diversification
Diversification spreads your dollars across a number of different investments that have varying patterns of risk and return over time. When you diversify, you potentially reduce the likelihood of being affected by the poor performance of a single investment type, prey to such factors as interest rates, inflation and industry cycles.
Diversification can help reduce, but cannot eliminate, risk of investment losses. Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance. There is no assurance that by assuming more risk, you are guaranteed to achieve better results.
Stick With The Plan
Once you've devised a plan, stick with it. By making regular contributions, you'll not only keep your nest egg growing, but you'll enjoy the advantages of an investment technique called dollar-cost averaging. This involves putting a fixed amount of money into an investment on a regular schedule, regardless of market price.
For example, you invest $100 in ABC Company each month. If the share price is down, you'll be able to buy more shares, and if the price is up, you'll buy fewer shares. Over time, your share prices should "average out," since you'll purchase some shares at a higher price; others at a lower price. While dollar-cost averaging doesn't guarantee a profit or protect you from loss, it does free you from the burden of always trying to hit the market at the "right time."
Using dollar cost averaging does not assure a profit and does not protect against loss in a declining market. Also, using this investment method involves continuous investment in securities regardless of fluctuating price levels of securities. Therefore, an investor should consider his/her financial ability to continue purchasing through periods of low price levels.
Don't chase yields
And don't play the "market timing" game. Although it's important to be flexible, industry specialists caution against jumping in and out of investments in the hopes of making a quick profit. Even experienced investment managers acknowledge that market timing is difficult at best, disastrous at worst.
If you're a new investor, it pays to gather as much information as you can. Read up on investing and money management techniques. Make a periodic review even if you're an experienced investor. It's important to review, and possibly adjust your plan periodically to make sure it's still appropriate. You'll want to review four areas:
- Investment results
- Life changes, such as employment, housing or health
- Your financial and tax situation
- Your objectives & portfolio allocation
Just like a car, you need to keep your plan in tune, to keep it performing at its best. Lincoln Financial Advisors' professionals can provide the information, advice and solutions to help you work toward your financial future and secure retirement.