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Wealth Creation

To grow wealth, three elements are essential: available cash, available time, and a right plan. First,
having cash to build wealth requires discipline and sacrifice. Psyching yourself up for financial success
helps you to stay the course even when the going

is difficult. You will be more prepared to overcome temptations to satisfy present wants in order to
build future gains. Only then will real hard cash be available to feed your wealth machine. Second, your
wealth machine will require time to generate greater wealth. The more time you give to it, the higher
value it can create for you. Third, a proper plan to grow your wealth provides you the strategies to
attain your financial objectives. It should comprise not only programs to create wealth, but also
safeguards to protect your wealth against life uncertainties. To obtain insurance cover, good health is a
pre-requisite. Any health impairment is likely to lead to higher premiums, partial exclusion of cover or
even total exclusion of cover. Such exclusions will compromise the effectiveness of a total solution for
you. Hopefully, this is a good enough reason for you to address your insurance needs as early as you
can.

Growing Wealth

A core component of the solution is to grow your wealth. To do that, we need to first determine both
your appetite and your capacity for market volatility. This, in turn, will determine the range of
investment instruments that are appropriate for you. Taking into consideration the time you have
before the funds are needed, we can determine the required contribution you need to make in order to
attain your objectives. Your contribution can be made in one lump sum or at regular intervals
throughout the given time horizon. Taking the retirement example stated above, the couple would
need to invest S$3,340 a month into a portfolio that yields 8 per cent yearly over the next 20 years. The
challenge here is to construct portfolios with different focuses. A core portfolio will comprise well
diversified asset classes and securities designed to withstand market volatility so as to yield more stable
returns over the long term. Additional portfolios built for tactical reasons will focus on higher yield
opportunities in the short term. Naturally they carry greater risks, but at the same time they could give
the additional boost to total returns. The overall portfolio structure should also adopt a lower risk
profile as the time to liquidate for a specific need draws near.

Protecting Wealth

An equally essential component in your solution is having adequate insurance to preserve the wealth
you have created. You protect your asset value by avoiding huge draw downs on your funds for
expenses arising from illness or disability. You also need to ensure that money continues to be added to
 your investment so that your funding objectives will be achieved ultimately. First, a life long
hospitalisation cover providing comprehensive benefits is an absolute essential. If you are in your prime
years, you should consider obtaining the best hospital care possible in order to maximise your chances
of a quick and total recovery. As premiums are relatively low for the pre-retirement period, it is
advisable to opt for the highest benefits plan available. You will have the option to downgrade your
plan to reduce the burden of escalating premiums as you approach retirement age. Other beneficial
features include guaranteed renewal, and portfolio underwriting (where premium changes are not
based on individual claims experience, but on the entire portfolio of policyholders).

Financial Objectives

The first step is to identify the financial objectives together with the client and to state them clearly.
There are various ways to categorise financial objectives. A popular way is centered on wealth and the
financial objectives are stated as follows: Part II Wealth Protection - through risk management and
insurance Wealth Accumulation - through savings and investments Wealth Conservation - through
retirement planning Wealth Transfer - through estate planning

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Life cycle approach for Financial Planning MCOM sem

1 Delhi University

Financial needs continually change throughout an individual’s lifetime. Many people follow
similar financial patterns during their life. However, everyone has an individualized
financial plan that is
dependent on many different factors in an individual’s life. Financial planning is a tool used
to achieve financial success based upon the development and implementation of financial
goals. It is important to use financial planning to help a person avoid financial difficulties.
By having well-written financial goals and implementing them into a financial plan, a
person will have the means to achieve the standard of living they desire. An individual’s
values, goals, personal choices, major life events, lifestyle conditions, and life cycle needs
work together to determine the details of an individual’s financial plan. As these factors
change, so does an individual’s financial plan. Financial planning is an ongoing process
that is affected by expected as well as unexpected events.Life cycle approach for
Financial Planning MCOM sem 1 Delhi University.

Life cycle approach for Financial Planning MCOM sem 1 Delhi University

Financial Goals

Financial goals are specific objectives to be accomplished through financial planning.

Goals should be consistent with personal values and attitudes. Financial goals should be
SMART goals.

1.Specific

2.Measurable

3.Attainable

4.Realistic

5.Time Bound

Lifestyle conditions
Lifestyle conditions are affected by an individual’s values, goals, personal choices, major
life events, and
life cycle needs. Any lifestyle condition changes may require an individual to re-evaluate
their financial plan. People may change careers, start careers, or start families late in life.
For example, a single 40 year-old with no children will be focusing on different financial
plans than a married 40 year-old with 2 children.Life cycle approach for Financial Planning
MCOM sem 1 Delhi University.

Life cycle approach for Financial Planning MCOM sem 1 Delhi University

Financial Life Cycle

Although everyone has a specific financial plan, there is a typical financial life cycle
pattern that applies to most people.A life cycle is defined as a series of stages in which an
individual passes during his or her
lifetime. This life cycle pattern includes three stages . The amount of time it takes to move
through the financial life cycle varies for every individual or household.

Personal Financial Management Pyramid

The levels which contribute to a well-managed and balanced financial plan are shown on
the Personal
Financial Management Pyramid. It starts with basic financial requirements on the bottom,
focuses on wealth accumulation in the middle, and moves up the pyramid to distribution of
wealth as the final financial plan. The pyramid is based on a hierarchy where decisions at
one level affect the other levels. As a person moves up the pyramid, their financial plan
becomes more complex.

Life cycle approach for Financial Planning MCOM sem 1 Delhi University

Personal financial planning consists of three general activities:

• Controlling your day-to-day finances to enable you to do the things that bring you
satisfaction and
enjoyment.
• Choosing and following a course toward longterm financial goals such as buying a
house, sending your kids to college, or retiring comfortably.
• Building a financial safety net to prevent financial disasters caused by catastrophic
illnesses or
other personal tragedies.

Life-Cycle Financial Planning

Financial and tax planning are frequently done in a vacuum without consideration of the
changing risks that one faces over one’s lifetime. The passage of time alters the nature of
the risks, and requires you to reconsider how you are managing them and whether you
should reprioritize them at different times of your life. Life-cycle financial planning helps
you understand the dynamic nature of the financial risks presented and develop a plan
that evolves over time to meet those changing needs.
The early working years (ages 25 to 45)
The early working years are years when your career is developing and your largest
financial burdens are likely a mortgage, supporting a growing family and the looming costs
of college. During these years, it’s important to:

 Establish an emergency fund. The starting point for financial planning during this
phase is establishing an emergency fund of approximately six months of income.
This fund is your self insurance in case you lose your job or have an unexpected
health event that costs more than your health insurance covers. The discipline of
having an emergency fund is a constant during your entire work life, although it may
be possible to taper and eventually eliminate this fund as you near retirement.
 Prepare for the unexpected with health, life and disability insurance. During the
early working years, the greatest financial risks are driven by the fact that you have
a fairly long period of working years ahead of you, and that you also have significant
future expenses (e.g., a mortgage and college tuition for children). The risk, then, is
that if something happens to you to prevent you from working during that time, those
who depend on your income will not have the income you and they expected. Of
course, health, life and disability insurance can all help you manage these risks, and
it is critical during the early working years that you have access to and use such
products to protect yourself and your family.While health insurance protection is a
constant need, life insurance may not be critical before marriage. Once married, the
need will increase with each child you have.
 Start saving for retirement. While the number of years to retirement is relatively
long, the more you save during the early working years, the less pressure there will
be to save and seek high investment return in your later working years.
 Start saving for college. During the early working years, it’s also important to set
up a college savings plan. The flexibility of retirement savings is that the funds can
be used for retirement or, if needed, college costs. For example, an individual
retirement account can be used to pay for college costs and avoid the 10 percent
penalty tax, though the tax-deferred growth will be subject to tax. Also, many 401(k)
plans allow for loans that can be used to pay for college costs.By comparison, a 529
plan must be used for education costs. There is no one-size-fits-all rule, and there
can be compelling state incentives for using a 529 plan, but on balance the
emphasis should be first on retirement savings and second on pure college savings.

The later working years (ages 45 to 65)

The later working years are characterized by paying college tuition, helping children
become financially independent, possibly caring for your parents or parents-in-law and
paying off your mortgage. During the later working years, it’s important to:

 Prepare for a chronic illness with long-term care insurance. During the later
working years, life insurance might become less critical for your planning, except for
life insurance that is needed for estate tax planning or that can pay for chronic
 illness.A catastrophic illness could well deplete your lifetime savings, so long-term
care insurance is also something to consider because the odds of chronic illness
increase with age and the cost can be prohibitive if you wait for retirement to obtain
coverage. A reasonable alternative to pure long-term care insurance may be a rider
to a life insurance policy that can fund such health care expense.

 Understand how much retirement savings you need. The later working years are
critical retirement savings years, as the number of years you are working and
building up your retirement nest egg are declining.During these years, it is important
to start thinking about your retirement assets as sources of income to live on. To the
extent your retirement assets are before-tax assets, you need to consider the tax
impact of distributions so you can understand how much after-tax income you will
have in retirement. You pay your rent and other bills with after-tax money, so it is
important that you understand many of your retirement assets have an embedded
tax liability and you only have a portion of the asset to generate living income.Life
cycle approach for Financial Planning MCOM sem 1 Delhi University.

 Review sources of retirement income. As you think about how your retirement
savings can generate income for living in retirement, you should also start to
consider the various sources of retirement income at your disposal and what they
will mean for your retirement position. Start with your projected Social Security
benefit payment and then add any traditional pension plan payment that you may
have through an employer. Many financial planners now think assuming a 3 percent
annual withdrawal is relatively safe, and possibly 3 percent increased further by an
amount reflecting inflation each year.Life cycle approach for Financial Planning
MCOM sem 1 Delhi University.Once you have determined the amount of annual or
monthly retirement income your assets should safely generate, compare that with
your retirement income goals. Your retirement income goals can be as simple as 80
percent of your pre-retirement income, or you can get finer and map out your
retirement costs and target that amount. The bottom line here is, again, reasonably
conservative assumptions that you can refine over time and will hopefully get more
and more precise as you get closer to your retirement age.Life cycle approach for
Financial Planning MCOM sem 1 Delhi University.You should have a high degree of
confidence that you will receive your base retirement income payments, such as
Social Security and your pension plan payments, for as long as you live (subject to
your electing a lifetime payout under your pension plan if there are non-lifetime
options). If your retirement income base and additional income are insufficient for
your needs, greater saving is required to meet your goals.Life cycle approach for
Financial Planning MCOM sem 1 Delhi University.

 Consider an annuity. During these years, consider whether you want to purchase
an annuity product that will further increase the amount of guaranteed lifetime
 income you are to receive. Given the increasing full retirement age for Social
Security and the demise of traditional pension plans, future retirees will have less of
their retirement nest egg in the form of guaranteed lifetime payments. Of course,
you should retain liquidity to manage emergency matters, but you still may want to
increase the amount of your retirement assets that provide guaranteed lifetime
income so you know, at least with respect to that portion of your retirement nest
egg, you have offloaded investment and longevity risk.Life cycle approach for
Financial Planning MCOM sem 1 Delhi University.

After work ends (ages 65 and on)

As your working years come to an end, your priorities will shift from saving to living off
your savings. During this time, you’ll need to:

 Decide when to stop working. The decision as to when to stop working is probably
the most important decision in terms of influencing how long your retirement savings
will last. Each year you work is a year you do not need to be supported by your
savings, and possibly another year you can add to your savings. Retiring before age
65 creates the issue of having to fund health care until you qualify for Medicare, and
retiring before age 70 creates the risk that you will access your Social Security
benefit at an age that locks in a reduced benefit. While it might seem like a right to
retire by age 65, the notion of retirement at such an age is a relatively recent
phenomenon, and it might well be better for you financially, emotionally and
physically to work longer.Life cycle approach for Financial Planning MCOM sem 1
Delhi University

 Maintain an income stream. After you retire, the focus of financial planning will
center on maintaining your retirement income stream. This requires you to manage
and monitor the investment performance of your assets and the inflation that will
likely be eroding your purchasing power year by year, and ensuring your expenses
are not exceeding your plan. To the extent you have not done so already, you can
still purchase an annuity that will guarantee you lifetime income while relieving you
of responsibility for making sure the associated asset is not depleted by poor
investment return and your living longer than expected.Life cycle approach for
Financial Planning MCOM sem 1 Delhi University

 Plan for health and long-term care costs. Another point of focus will be health
care, because even if you are Medicare-eligible, a significant amount of retirement
savings is spent on health care costs not covered by the government. In fact, as
retirement continues, health care spending becomes the largest retirement cost and
the most likely to cause the type of financial stress that thwarts your retirement
planning.Life cycle approach for Financial Planning MCOM sem 1 Delhi
 University.During these years, life and disability insurance are no longer primary
needs, other than life insurance for estate planning or to support long-term care
costs.

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Introduction to Personal Financial Planning

OVERVIEW OF PERSONAL FINANCIAL PLANNING Imagine yourself trapped in a maze filled with
twists and turns, blind alleys, and dead ends. Wouldn’t exiting it be simpler if you had a map and compass to guide
you? Your financial life can be a maze, and a personal financial plan is the map and compass that can help guide you
through that maze. Individuals use a variety of investment, risk management, and tax planning strategies to meet
their financial goals. Those goals change over a person’s lifetime, and a flexible financial plan can be modified as
circumstances change.

The Nature of Personal Financial Planning Personal financial planning helps individuals and families
reach goals that require money to achieve, such as having adequate retirement income or resources to cover college
expenses. With good planning, most people find they can achieve their desired standard of living and meet their
financial goals in a timely and orderly fashion. Many people conduct financial planning on an ad hoc basis. For
example, parents may fail to put aside money for a child’s college education until the child’s final year in high school.
A family may begin saving for the purchase of a home but then have to divert the savings to the expenses of daily
living following a job loss. A father with young children could fail to plan adequately for the death of his spouse and
have to suddenly adjust to unforeseen child care expenses. A sound financial plan can reduce or eliminate the
financial stress of these situations. Comprehensive personal financial planning focuses on allocating resources toward
the achievement of financial goals in a systematic manner. Goals are first established and then prioritized. Once the
set of priorities is determined, individuals can develop plans to meet those financial goals in the desired order.
Financial goals often create conflicts because individuals have limited resources to achieve their goals. Resources
devoted to current consumption are resources that will not be available to fund future consumption. This year’s
dream vacation takes away funds that could be used to provide for retirement. However, some financial goals can be
complementary to one another. Under current tax laws, certain forms of retirement savings can also be used for the
Personal financial planning The process by which individuals and families develop and implement a comprehensive
plan for achieving their financial goals. 1.4 Financial Planning purchase of a first home or for college expenses. That
means that savings put aside in a retirement savings account may be available to meet other goals. Financial planning
is a continuous process, because goals and priorities change over time. An individual or family may meet one financial
goal sooner than expected and then be able to divert resources toward other goals, or an individual or family may be
unable to meet a goal and have to adjust priorities. For example, a family setting aside 20 percent of every paycheck
in a retirement account may suddenly need to provide in-home care for elderly parents. That change in priorities
would require diverting funds from future consumption to current consumption. Throughout the financial planning
process, individuals and families must remain aware of the effect of current tax policies on the financial plan. Changes
in tax policies may require that priorities be rearranged or that financial plans be altered. Risk management planning
is also an important element of financial planning, and risk management planning and tax planning affect investment
strategies. Successful financial planning is a process that integrates all of these diverse elements into a coherent and
dynamic road map for achieving financial goals over an entire lifetime. See the exhibit “Hierarchy of Financial
Planning Goals.”

Personal Financial Planning Goals

Before developing financial action plans, an individual or a family should establish personal financial
goals. After establishing these goals, priorities for the goals are determined to guide decisions regarding the timing
for achieving those goals as part of the overall comprehensive financial plan. For example, suppose a family has two
goals. First, it wants to fund the college education of two children. Second, it wants to save money to purchase a
retirement home after the children complete college. The family will not purchase the retirement home before the
children graduate from college. Therefore, establishing and building the college fund takes priority over establishing
and building the fund for a retirement home. If the family cannot begin to fund both concurrently because of budget
constraints, the comprehensive financial plan will first focus on the college fund and, once that goal is achieved, will
shift focus to the retirement-home fund. Financial goals and the priorities attached to those goals differ by person
and by family and also change over time. For some people, improving their current standard of living is the most
important financial goal. For others, saving for retirement is the primary financial goal. Improving their current
standard of
 living might be an additional, but secondary, financial goal. However, most people have these basic
financial goals throughout their lives: • Provide for the basic essentials of living (food, clothing, and shelter). Basic
living expenses must be met before other non-essential goals are addressed. • Protect against loss of income or
wealth caused by injury, illness, or death. Risk management techniques are essential to protect the individual or
family from losing the gains they have already achieved. Hierarchy of Financial Planning Goals Individuals use a
variety of investment, tax planning, and risk management techniques to achieve a hierarchy of financial goals over
the course of a lifetime. Tax Planning Investment Strategy Risk Management Estate Plan Save for Retirement Build
Wealth Fund College Expenses Major Asset Purchases Emergency Fund Protect Against Loss of Income or Wealth
Provide for Basic Living Expenses [DA08104] 1.6 Financial Planning After providing for these basic financial goals,
other financial goals may include these: • Paying off student loans or credit card debt • Purchasing a home or making
other major asset purchases • Funding college expenses • Building wealth • Saving for retirement Finally, individuals
may establish goals related to the distribution of their assets after death. Estate planning goals may include providing
for the future care of disabled dependents, passing wealth on to future generations, or providing funds to favored
charities. Personal Financial Planning Life Cycle Financial goals change over time following changes in earnings,
marital status, economic conditions, and so on. The personal financial planning life cycle reflects the changes that
occur over a person’s lifetime. Throughout this life cycle, individuals have to continually refine their personal financial
plan to meet these ever-changing financial goals. See the exhibit “Personal Financial Planning Life Cycle.” In childhood
and adolescence, individuals are dependent on their parents or guardians for support. They typically have little or no
income, and their expenses are subsumed within the overall household expenses. They have no need for tax
planning, retirement planning, or risk management planning. Even after they go off to college, most adolescents’
personal financial planning issues are taken care of by parents. Planning becomes more complicated in the early
twenties. Some individuals move directly from high school into careers and begin to accumulate savings to buy cars
and houses. Others go to college before starting a full-time job. These individuals may have college loans to pay off in
addition to saving for cars and houses. They are now typically responsible for their own auto insurance. They may
have limited retirement savings through an employer sponsored plan. Recent law changes allow children up to age
twenty-six to remain on their parents’ health plan, but they may obtain their own health insurance either through
their employer or an individual, private plan. In their late twenties and thirties, many individuals marry and enjoy the
benefits of two incomes with no children. As these couples begin to start families, their financial goals shift toward
protecting themselves and their dependents from loss, while at the same time increasing their standard of living.
They begin accumulating funds for their children’s college education or other future needs such as buying a first
home or moving up to a larger home. Risk management planning becomes more important at this stage of the life
cycle when individuals or families have dependent children. Educational needs, life

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affects-personal-financial-planning