No Slide Title - Norwalk City School District financial...Prepare a summary of your assets –cash,...

Financial Planning

Presented by:

Dennis S. Medica, CPA, CFF, CGMA, CFE, CVA

March 24, 2017

http://www.cbsnews.com/news/the-financial-fragility-of-the-american-household/

1© 2014 Medica, LLC. All rights reserved

Health and Financial Planning

WHY?

Money worries are leading source of stress

http://www.cbsnews.com/news/the-financial-fragility-of-the-american-household/


Personal Savings Rate

1/1/1959 -4/1/2016

2.0% 7/1/2005

17.0% 5/1/1975

5.4% 4/1/2016


Expansion of Personal Debt

“…the expansion of consumer credit in the United States has allowed middle class and poor Americans to live beyond their means, masking their lack of wealth by increasing their debt. We might think that people who have "zero net worth” have nothing. But in fact, having zero net worth increasingly means owning a lot (cars, televisions, even houses) – but also owing a lot. As a result people with zero net worth, and even negative net worth, can still feel that they are living the American dream, doing “better” than their parents did while keeping up with the Joneses.”

Michael I. Norton - associate professor at the Harvard Business School.

http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=326229


Have a Financial Plan


…Remember

“It is not necessary to do extraordinary things to get extraordinary results.”

“Risk comes from not knowing what you’re doing.”

Warren Buffett - businessman and philanthropist

http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=326229


Financial Planning Process


Create Your Own Personal Financial Plan

Determine

where you

want to be

financially

Design and

implement

a plan to

reach your

goals

Assess

where you

are now

financially

Steps in developing a personal financial plan:

Monitor

the plan


Assess where you are now financially

Gather and organize your financial documents

Income tax returns

Bank statements

Insurance policies

Retirement account statements

Pay stubs

Employee benefit statements

Credit card statements

Mortgage statements


Assess where you are now financially

Prepare a net worth statement:

Prepare a summary of your assets – cash, investments, home, car(s), jewelry

Prepare a summary of your loans – home mortgage, car loan, student loan(s), credit card(s)

Subtract your loans from your assets to determine your net worth


Monthly Expense Worksheet

Spent Budgeted Spent Budgeted Spent BudgetedSavings Medical/Health Personal

Emergency Fund Medications Child Care / Sitter

Retirement Fund Doctor Bills Toiletries

College Fund Dentist Cosmetics / Hair Products

TOTAL SAVINGS GOAL = 10%-15% Optometrist Education / Tuition

Housing Vitamins Books / Supplies

First Mortgage / Rent Other: Child Support

Second Mortgage TOTAL MEDICAL/HEALTH GOAL = 5%-10% Alimony

Real Estate Taxes Transportation Subscriptions

Repairs / Maintenance Gas and Oil Organization Dues

Association Dues Repairs and Tires Gifts (including Christmas)

TOTAL HOUSING GOAL = 25%-35% Licenses and Taxes Replacement Furniture

Food Car Replacement Pocket Money - His

Groceries Other: Pocket Money - Hers

Restaurants TOTAL TRANSPORTATION GOAL = 10%-15% Baby Supplies

TOTAL FOOD GOAL = 5%-15% Insurance Pet Supplies

Utilities Life Insurance Music / Technology

Electricity Health Insurance Other:

Gas Homeowner / Renter TOTAL PERSONAL GOAL = 5%-10%

Water Auto Insurance Debts

Trash Diability Insurance Car Payment 1

Phone / Mobile Identity Theft Car Payment 2

Internet Long-Term Care Credit Card Payment 1

Cable TOTAL INSURANCE GOAL = 10%-25% Credit Card Payment 2

TOTAL UTILITIES GOAL = 5%-10% Recreation Credit Card Payment 3

Clothing Entertainment Student Loan 1

Adults Vacation Student Loan 2

Children Other: Other:

Cleaning / Laundry Other: TOTAL DEBTS (true goal=0%) GOAL = 5%-10%

TOTAL CLOTHING GOAL = 2%-7% TOTAL ENTERTAINMENT GOAL = 5%-10% TOTAL

Monthly Cash Flow


Personal Financial Ratios

Savings Ratio: Should be between 10%-20%. Current period’s cash surplus to current period’s income after tax. For most Americans this rate is currently 5.4% (4/1/16)

Consumer Debt Ratio: Should not exceed 20%. Monthly consumer debt payments to monthly after tax income. Includes credit card, auto loan and department store account payments.

Housing Cost Ratio: Should not exceed 28% of gross income.Monthly mortgage payment (principal + interest) + 1/12 annual real estate taxes + 1/12 annual homeowners insurance premium + 1/12 annual association fees divided by gross monthly income.

Total Debt Ratio: Should not exceed 36% of gross income. Total monthly loans divided by gross monthly income.


Evaluate and Manage Expenses / Cash Flow

Cut discretionary spending: Itemize where you are spending your money and prioritize needs versus wants.

Lower debt payments:

Refinance your mortgage – if you plan on being in your house for more than 5 years and you can reduce the interest rate by at least 1.5%.

Take advantage of balance transfer offers from credit card companies to pay off higher interest cards – do not make purchases on new card and destroy the old card.


Analysis of Expenses

Essential vs. Discretionary Expenses

Essential expenses (required):

– Housing

– Clothing

– Food

– Utilities

– Basic health care

Discretionary expenses (forgone or reduced, if necessary):

– Travel

– Entertainment

– Gifts


Expect the Unexpected

One-Time Expenses

– Child’s wedding

– Child’s or grandchild’s college tuition

Unexpected Expenses

– Financial support of parents

– Supporting adult children

93% of Baby Boomers indicated that they have helped their adult children financially with expenses such as college loans, auto and home costs and medical expenses (study by Ameriprise Financial, Inc.)


Beware of Challenges to your Financial Plan

Watch out for cash leakage

– Do not allow cash withdrawals from the ATM evaporate from your pocket with out apparent explanation.

– If you find yourself at the ATM more than once a week, you need to examine where your cash is going.

Do not count on windfalls

– When projecting the amount of money you can live on, do not include amounts you are not sure you will receive: Year-end bonuses Tax refunds Investment gains

Beware of spending creep

– As your income increases due to raises, promotions and smart investing, do not start spending for luxuries unless you are certain you will continue to adhere to you financial plan.

– Use the increased income to save more.


Emergency Fund

Emergency Fund - cash you have saved for the sole purpose of helping you maintain your normal life through the unexpected emergencies that happen. Your goal should be 3 to 6 months of your household / living expenses.

– Loss of employment

– Appliance or home repair

– Auto repair

– Medical emergency


How to Start an Emergency Fund

Open an account – savings or money market account at a bank

Determine how much you can afford to save – get started today, even $25 per week will help

Set up automatic deposits – make it easy and forget about the account

Look for additional cost savings to fund your emergency fund

– Request a rate reduction on your credit cards

– Shop around for lower rates on auto and homeowners insurance

– Set up a carpool / use public transportation

– Install a programmable thermostat – and program it

– Trim unnecessary monthly bills – terminate premium cable channels you do not watch


Maximize Contributions to Retirement Plans

You can generally plan on needing 70 – 90% of your pre-retirement income each year of your retirement.

To refine that amount, now is a good time to take a look at what you would like your retirement lifestyle to be and how your retirement expenses might change in retirement, including health care.

Make sure to revisit your goals and projections regularly

http://www.ameriprise.com/retire/planning-for-retirement/retirement-ideas/retirement-lifestyle.asp

http://www.ameriprise.com/retire/planning-for-retirement/retirement-income-funds/#near

http://www.ameriprise.com/retire/planning-for-retirement/retirement-income-funds/retirement-cost.asp


Power of Continuous Contributions and Compounding

Compounding can be quite powerful – gains on initial principal and thereafter gains on the gains

Julie starts contributing $5,000 per year into an IRA at age 25 and continues to do so through retirement age of 70. She would have amassed $1,641,122 by age 70.

Amy did not start contributing $5,000 per year into her IRA until the age 35. She only amassed $796,687 by age 70.

A difference of $844,435. Amy could have more than doubled her retirement savings if she started 10 years earlier.

The above scenarios assumes a hypothetical and steady 6% annual return.


Estimate Your Retirement Expenses

To determine how much money you will need to retire, you must estimate your retirement expenses, or how much you expect to spend each year in retirement.

Start by identifying how much you spend now

– What is your take home pay?

– What expenses are deducted from your paycheck that you will have to pay out-of-pocket once you are retired?

– What extra expenses do you want to budget during retirement (travel, increased medical expenses)?

– Build in monthly savings for items that will eventually need to be replaced (major home repairs, auto purchase)

– Do you have expenses that will decrease in retirement (transportation costs for commute to work)?

– Estimate taxes you will pay in retirement.


Estimate Your Retirement Expenses - Example

Current take home pay: $4,300 per month ($51,600 per year)

Expenses paid by employer that will come out-of-pocket once retired: currently employer pays for healthcare insurance premiums; once retired you will have to pay $350 per month ($4,200 per year) for this coverage

Extra expenses: you budget $500 per month ($6,000 per year) for travel

Total monthly expenses: $5,150 per month ($61,800 per year)

Income taxes on retirement income: $61,800 / (1-.15) = $72,705

You will need approximately $73,000 in retirement savings per year to retire comfortably


Retirement Expense Worksheet

Expense Monthly Annual Expense Monthly AnnualTaxes (Variable with Income) Medical/Health (Essential)

Federal Health Insurance

State Life Insurance

Local Long-Term Care Insurance

TOTAL TAXES Disability Insurance

Household (Essential) Medical Expenses

Mortgage / Rent Dental Expenses

Property Taxes Other:

Maintenance TOTAL MEDICAL/HEALTH

Home/Renter's Insurance Family Care (Essential)

Electricity Parent/Child Care

Oil/Gas Education

Water/Garbage/Sewer Clothing

Telephone/Cell Phone Other:

Cable/Internet TOTAL FAMILY CARE

Other: TOTAL ESSENTIAL EXPENSES

TOTAL HOUSEHOLD

Auto and Transportation (Essential) Discretionary

Car Payment Entertainment

Maintenance/Repairs Dining Out

Gasoline Hobbies

License/Registration Publications

Insurance Education

Other: Traveling/Vacations

TOTAL AUTO AND TRANSPORTATION Charitable Donations

Living Expenses (Essential) Gifts

Food Professional/Social Dues

Clothing Gym Membership

Beauty/Barber Other:

Other: TOTAL DISCRETIONARY EXPENSES

TOTAL LIVING EXPENSES TOTAL EXPENSES

Retirement Expense Worksheet


Evaluate Medical Insurance Needs - Health Savings Account


Health Savings Account


Health Savings Account - IRS Limits

Minimum deductible is the deductible requirement for an HSA-compatible high-deductible health plan (HDHP).

Maximum out-of-pocket is the annual maximum amount of out-of-pocket expenses an HSA-compatible HDHP can require before paying out benefits.

Healthcare Savings Account Single Plan Family Plan Single Plan Family Plan

Maximum Contribution Limit $3,350 $6,750 $3,400 $6,750

Minimum Deductible $1,300 $2,600 $1,300 $2,600

Maximum Out-of-Pocket $6,550 $13,100 $6,550 $13,100

Catch-up Contribution (55+) $1,000 $1,000 $1,000 $1,000

2016 IRS LIMITS 2017 IRS LIMITS


Next Steps

Construct Your Strategy

Meet with a financial professional to assist you in developing your overall financial strategy.

Consider all the various components of your financial plan and be certain that you have a strategy that will help you achieve your goals.


Summary

Identify where you are financially

Adjust your expenses to help achieve your goals

Build your emergency fund

Pay down your debt

Maximize your retirement savings

Construct your financial strategy

Continually evaluate / monitor your financial strategy and modify as needed


Questions and Comments

Contact information:

Dennis S. Medica

216-357-2646 phone

[email protected]

Medica, LLC

815 Superior Avenue, East

Suite 1916

Cleveland, Ohio 44114


800.989.3277

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No Slide Title - Norwalk City School District financial...Prepare a summary of your assets –cash,...

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