There are, in effect, five phases of planning for and transitioning into retirement from a financial perspective.

Phase 1

Fifteen years prior to your planned retirement date develop a financial plan. An essential part of your retirement financial plan is understanding what your retirement benefit from your Federal career will be, the areas over which you have some choice and what the options are, as well as the cost/benefit ratio.

Every individual/couple needs to develop their net worth, cash flow and set financial goals. These three basic financial tools create a financial road map.

Your net worth is what you own minus what you owe on what you own. It is the “You are Here” part of the financial road map. An additional advantage of doing a detailed net worth statement is that it will give you an opportunity to review your homeowner’s insurance to determine if you have adequate coverage.

With cash flow, the concept is to document your income and your outgo. For most people, that is easy — if it comes in, it goes out. The key is “Where is the money going?” Until you see where the “little money” is going, it will continue to go. In most cases, there is little that you can do about mortgage payments, car payments, utilities, food, etc., but it is the “little money” that can really add up over the year. In many cases, you would not feel deprived if you cut back on some of the items you are currently spending money on and it could be healthy foregoing the bag of chips with lunch, downsizing from the “Grande” to the “Regular,” packing a lunch instead of eating out every day, cutting back on the dinners out each month, etc. When you see what you are spending that is non-essential you can then modify your spending habits The bottom line of the cash flow statement is this amount is available for discretionary savings and investing. The cash flow is the “vehicle” in your financial road map.

Goals – only you and your spouse can establish your goals. If you are a couple, each should establish goals then work up an acceptable set of goals you both can live with. You should have long-term goals-paying off your mortgage, having a sufficient nest egg to retire comfortably, etc. Mid-term goals differ depending on where you are in your life-for some it can be saving enough to cover the children’s university cost, helping a child establish a business/practice, buying their first home, or as is becoming common, helping a parent or in-law with medical expenses. Short-term goals -paying off credit card debt, saving enough to pay for items as needed (new car, vacations, gifts) and establishing an emergency fund.

With these three elements documented, you may decide that you need some professional advice – but you may be fine on your own. If you decide to seek professional help do your homework first. What is it that you want the professional to do for you – a one-time review, or on-going advice on investments? What is the “professional’s” credentials? How do they make their money? How long have they been financial advisors?

Financial planners make their money in one of the following ways:

The issue of how the professional makes their money is also extremely important:

• Commission – This transaction-based fee, 2% to 6% of your investment, is split between your planner and the company for which he or she sells. This arrangement presents a subtle conflict of interest, so your advisor’s integrity is key. Note: If you’re a frequent trader, flat fees are probably more cost-effective.

• Fee-Offset – Some planners who are technically fee-based still sell commission products, using the money to offset fees they’re charging you. Make sure the arrangement will reduce your costs and provide you with suitable investments.

• Fee-Based – These planners charge both commission and fees. Get an estimate of fees along with the percentage of commissions that the planner will be paid for products you buy.

• Asset-Based Fees – This is an annual charge based on the percentage of assets a planner manages for you. Fees may run as high as 1.5% annually and should cover the cost of a comprehensive plan and building and managing a portfolio that meets you needs.

• Retainer or Flat Fee – An annual or one-time fee that a planner charges for yearly planning or a specific planning task. The cost will depend on the complexity of your needs, but shouldn’t range higher than 1% of your assets.

• Hourly Fees – Some planners charge by the hour to address specific client questions. Hourly fees range from $125 to $175. Make sure you get an estimate and the maximum you can be charged in writing. If you’re looking for ongoing service, an annual asset-based or retainer fee might be more cost-efficient.

Make sure to stay involved in your financial future.

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