Your financial plan will consider all aspects of your financial life. As discussed, it should include an annual budget or spending plan. If your outstanding debt is significant in relation to your assets, a debt reduction plan may be an important part of your overall financial plan. In addition, your plan should cover each of the following areas to the extent needed to reach your goals:

• Life insurance and disability planning
• Investment planning
• Education funding (if applicable)
• Retirement planning
• Estate planning

Life Insurance and Disability Planning

What would happen to your goals and your family's financial security if you were to die or were disabled and no longer able to work? With adequate insurance planning, major lifestyle changes due to a lack of income should not be necessary.

Click here to use the Insurance worksheet with this section.

Life Insurance. With life insurance planning, the first question is always, "How much is enough?" Whether you need life insurance at all and, if you do, the best amount of insurance coverage to have depend on your particular circumstances. Many people start thinking about life insurance when they marry and have children. But, even if you aren't married, you may have someone else, such as a parent or sibling, who depends on you for financial support. The longer your dependents will need support, the greater your need for coverage.

Our worksheet will help you figure out how much additional coverage you need, if any. Start by estimating the income your spouse and/or dependents will continue to receive after your death. Then, estimate their annual expenses. (Use the figures on the Budget Worksheet as a frame of reference.) Any shortfall between the expenses and expected income is the amount of income your insurance proceeds will need to replace. One method financial planners use to calculate the amount of life insurance coverage needed is to figure $100,000 of coverage for each $5,000 of additional income needed. For a more accurate estimate of your life insurance needs, contact us.

If you discover you need additional coverage and you are still relatively young, term life insurance is generally the least expensive way to go because it provides "pure coverage"; you build no cash value in the policy. (Note that the cost of term insurance goes up as you grow older.) Term insurance provides protection for a specific number of years, with the death benefit paid to your beneficiaries if you die during the policy's term. When the term ends, so does your coverage, unless you renew the policy.

Cash-value life insurance, such as whole life, universal life, and variable life policies, provides protection over your entire life. For younger people, cash-value insurance is more expensive than term. But the premiums generally are fixed, so as the years go by, it can become less expensive. Cash values and interest accumulate in these policies tax deferred, and you can borrow from the cash value.

Disability Protection. Like life insurance planning, disability insurance planning is based on your particular needs, circumstances, and resources. Completing the disability portion of our worksheet should help you determine if you need additional coverage to protect your family should you become temporarily or permanently disabled. In addition, you may want to include long-term care insurance in your financial plan to help preserve your assets for your family in the event you suffer a prolonged illness.

But disability and long-term care insurance aren't the only aspects of disability planning. You also need to think about who will manage your assets if you become incapacitated and can no longer handle this responsibility yourself. A power of attorney may be a good solution. With a power of attorney, you choose someone to make financial decisions for you if you are unable to do so yourself.

Health-care Provisions. Also consider creating a living will and/or a durable power of attorney for health care to help ensure your wishes concerning the care you receive are carried out if you are unable to make health-care decisions yourself. A living will generally is used to express the desire not to receive extraordinary medical treatment. You determine the kind of medical care you want under the circumstances you describe. You should express your wishes in as much detail as possible.

A durable power of attorney for health care - sometimes called a "health-care proxy" - designates someone else to make decisions for you. The scope of a durable power of attorney generally goes beyond that of a living will. A durable power of attorney can address nearly any health-care decision. Your attorney can advise you concerning applicable law and draft the relevant documents for you.

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Investment Planning

Good investment planning can turn your goals from dreams into realities. This planning involves more than trying to pick the "right" investments. How you allocate your money among different types of investments can have a greater effect on investment success than the individual investments you choose. So, your first step in investing toward your goals is to work out an asset allocation for your investments.

Asset Allocation. Very simply, asset allocation is the process of deciding what percentage of your money to put in the different investment classes: stocks, bonds, money market, and other investments, such as real estate. Your asset allocation will depend on your investment time frame, your savings goal, and how much risk you are willing to take to achieve that goal.

Diversification. After you decide on an asset allocation, the next step is to diversify your money within the different investment classes. By putting your money in numerous different investments, you "spread the risk." To illustrate: Rather than invest in one stock, you might invest in a variety of stocks. That way, if one stock performs poorly, it represents a smaller portion of your overall stock portfolio.

Before you can set an asset allocation and diversify your investments, though, you need to know more about the choices that are available. In the next section, we give you a brief overview of the basic investment choices.

Stocks. Investing in stocks gives you an ownership interest in the corporation issuing the stock. If the corporation does well, your investment should do well. If not, you could lose some (or all) of your money. The advantages of investing in stocks include the potential for higher returns over time than those offered by most other investments and returns that historically have outpaced inflation. Both of these advantages make stock investments an appropriate part of a portfolio designed to achieve long-term investment goals.

Bonds. Bonds and other fixed-income investments pay a set income over a set term. At the end of the term, the amount you have invested is returned to you. Fixed-income investments offer a steady income stream and historically less volatile price fluctuations than stock investments. But fixed-income investments aren't without risk. Sometimes a bond issuer, for example, can run into financial difficulties, default on its bonds, and not be able to return the face amount of the bonds to investors.

Also, bond prices move up and down, largely in reaction to interest-rate swings. Thus, investors in bond mutual funds, as well as investors in individual bonds who don't plan on holding them until maturity face the possible risk of losing principal.

Money Market Investments. Like fixed-income investments, money market investments pay a defined income over a set term. (The income may be fixed or variable.) The advantage of money market investments is that many of them are backed by the U.S. government or insured by the Federal Deposit Insurance Corporation (FDIC), so return of your principal is practically guaranteed. This makes money market investments an attractive choice for investors with short-term goals. But be aware that a money market fund is neither insured nor guaranteed by the U.S. Government, and there can be no assurance that money market funds will be able to maintain a stable net asset value of $1.00 per share. The major disadvantage of this investment class is that the investments historically have not produced returns much greater than the inflation rate.

Mutual Funds. Mutual funds are one of the most popular ways to invest. With a mutual fund, your money is pooled with that of other investors to purchase a variety of securities. The fund is professionally managed as a single investment account. Mutual funds offer you automatic diversification because each fund invests in numerous different securities. When you buy shares in a stock mutual fund, for example, you are actually buying an investment in the stocks of many different companies. If one company or industry has a problem, the fund will be less likely to suffer a major loss because it is diversified.

You can choose from thousands of stock, bond, balanced (stocks and bonds), and money market mutual funds. Each fund is managed toward a particular investment objective, such as growth, income, or asset preservation. The mutual fund's prospectus will explain the fund's investment objective and tell you what types of securities the fund can hold.

Investment Return. When choosing investments, potential return is a key consideration. The higher your return, the faster your investments will grow and the sooner you will reach your goal. But be aware that the annual percentage returns and yields you see published in ads, prospectuses, and articles don't take into account inflation or taxes, two factors you need to consider in your investment planning.

You can use our worksheet to figure the real return of any investments you are considering. In some cases, you may find that a tax-exempt investment posting a lower return will actually give you a higher real return than a similar taxable investment.

Risk. You also need to weigh an investment's risk. Generally, the more risk involved with an investment, the higher its potential return. Consequently, the more risk you are willing to take, the more potential your savings have to grow over the long term. Before choosing an investment, you should make sure you understand the investment, the risk it carries, and how that risk relates to your investment goal.

For instance, if you are investing for your two-year-old child's college education, you can probably afford to assume more risk in your investing than someone whose child will begin college in two or three years. With more than 15 years before you'll need your money, you should have time to make up any short-term losses your investments may experience. Of course, there can be no assurance that any losses will be made up in a 15-year time period.

Click here to use the Calculating Real Rates of Return worksheet with this section.

As the investment pyramid shows, short-term investments, such as money market funds, offer the least risk. Fixed-income investments offer potentially higher returns with added risk. Stock investments offer the highest potential returns with the greatest amount of risk. A combination of money market, fixed-income, and stock investments can provide potentially higher returns than either money market or fixed-income investments alone, with only slightly greater risk.

As you near your goal, your risk tolerance may drop and you may want to change your asset allocation. Protecting and preserving your savings might become more important. You may be willing to give up the growth potential of most of your long-term investments in favor of the greater security offered by short-term investments.

Click here to read "Different Strokes," an example of how investment goals and asset allocations can differ.

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Education Funding

When should you start planning for a child's college education? Ideally, as soon as the child is born. The cost of four years at a private college or university currently averages about $90,000. The average four-year cost for a public college is about $42,000. With college-cost inflation now at an average rate of 5% - it has been considerably higher in the past - a child born today could need at least $100,000 to attend a public college for four years and more than twice that amount - $216,000 - for a four-year stint at a private college.

Don't become alarmed if you haven't started planning for your child's college education. No matter what the child's age, strategies are available to help you come up with the necessary funds.

Personal Investing. For young children, start putting money away regularly now, investing in higher-potential-growth securities and mutual funds as you would for other long-term goals, such as retirement. As your income increases, try to increase the amount you're investing. When a child reaches high school age, you'll probably want to begin moving college investments into lesser-risk investments.

At this point, if you own appreciated assets that you intend to sell to meet college expenses, consider giving them to the child, and letting the child sell them. The advantage? Potentially more after-tax money to meet expenses. If you sell the assets, you'll have to pay capital gains tax at your rate, probably 20%. A child in the 15% federal tax bracket will be taxed at just 10% on the same gain.

If you are eligible, you may want to consider using a Coverdell Education Saving Account (ESA) to help you save for your children's or grandchildren's higher educations. The ESA lets you contribute toward a child's future education expenses until the child turns age 18. (An age exception applies to special-needs beneficiaries.) Your contributions and the account earnings generally can be withdrawn from the ESA tax free to pay qualifying education expenses of the child. See us for more information on the eligibility rules.

Qualified Tuition Plans. These plans are tax-favored college investment programs sponsored by most states under Section 529 of the Internal Revenue Code. Generally, with a "Section 529" plan, you make a series of payments or a lump-sum payment to the plan and designate a child as the beneficiary of the plan account. The earnings on the account accumulate tax free and can be used to pay the child's college tuition and expenses. You can contribute to a Section 529 plan regardless of your annual income or your age, and your contributions can be for the benefit of a grandchild, niece, or nephew, as well as your own child. Also, you are not limited to using the plan sponsored by your state.

Beginning in 2002, educational institutions will be able to sponsor prepaid tuition programs. Also starting in 2002, distributions or education benefits received from state-sponsored programs will be excludable from income, rather than taxable to the college student beneficiary as they were prior to 2002. Tax-free withdrawals can be made from non-state-sponsored programs beginning in 2004.

If your child chooses not to attend college, the account can be returned to you (income tax and penalties may apply) or you can change the account beneficiary to another family member. Family members include the beneficiary's spouse, siblings, first cousins, children, nieces, nephews, and their spouses.

Loans. What if you haven't been investing regularly for your child's education, or your investment plan is falling short? You may need to borrow. A variety of government-subsidized and unsubsidized education loans are available to students and parents. Interest paid on qualifying student loans is tax deductible. Another strategy used by many parents is a home equity loan. With a home equity loan, the interest you pay on the loan also may be tax deductible.

You also might consider a loan from your employer-sponsored retirement savings plan. Or you may be able to take penalty-free withdrawals from your individual retirement account to pay for qualified higher education expenses incurred by you, your spouse, your children, or your grandchildren. Be aware, though, that you may have to pay federal income tax on some or all of the money withdrawn from your IRA. And use caution when borrowing or withdrawing money from any retirement account. You don't want to short-change your retirement.

Life Insurance. Many life insurance policies offer an investment component along with the insurance component. If you choose such a policy, you will have access to the policy's cash value as it accumulates. When your child is ready for college, you can borrow against the cash value to pay education expenses. In addition, adequate life insurance on both your and your spouse's lives can ensure your children will have the needed funds for college should something happen to either one of you.

Tax Credits. If you already have children in college, see if you can make use of the Hope Scholarship and/or Lifetime Learning Credits on your federal income-tax return. The Hope Scholarship Credit is available for a student's first two years of post-secondary education. Students must be enrolled at least half time to qualify. The Lifetime Learning Credit can be used for courses to acquire or improve job skills, as well as for undergraduate and graduate level courses at an eligible educational institution.

Click here to read "Rental Property-Another Strategy" for an example of how rental property can help with education funding.

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Retirement Planning

Click here to use the Estimated Retirement Income worksheet with this section.

Are you old enough to remember the good old days when a worker stayed with one employer and retired with a "nice pension" plus Social Security? Those days seem to be gone, maybe for good. Today, you need to take charge and plan for your own retirement security. Relying on Social Security for the bulk of your retirement income is an iffy proposition at best. Also, many companies today don't have traditional pension plans.

How much income should you plan on needing when you retire? A financial-planning rule of thumb is to figure on needing 70% to 80% of your pre-retirement income. That income is the income you'll be earning at the time you retire, not the amount you're earning now.

In doing your projections, be sure to consider the dramatic effect inflation can have on earnings and expenses. Even at the relatively low 3% annual inflation we've been seeing in recent years, someone earning $30,000 today may be earning $40,000 in 10 years, $54,000 in 20 years, and $73,000 at retirement in 30 years if he or she receives nothing more than cost-of-living raises.

You can use the accompanying worksheet to estimate what your retirement income needs might be and how much money you should be investing now to be able to meet those needs when you retire.

Once you've determined your retirement income needs, you need to plan for meeting those needs. The most advantageous way to invest for retirement is take advantage of various opportunities to defer or avoid federal income tax on retirement investment earnings.

401(k) and 403(b) Plans. Participating in an employer-sponsored 401(k) or 403(b) tax-deferred retirement plan is a smart way to build savings for retirement. You contribute part of your pay to a plan account set up just for you. You don't pay taxes on the amount you contribute or on the investment earnings in your plan account until you withdraw funds from the plan, usually at retirement. If your employer matches any of your contributions, this is an added benefit.

Traditional Individual Retirement Accounts. In 2002-2004, anyone who is employed or self-employed can open an individual retirement account (IRA) and contribute up to $3,000 a year, up from $2,000 in 2001 (or their earned income, if less). The annual limit on contributions increases to $4,000 in 2005-2007 and to $5,000 in 2008. After 2008, the limit will be adjusted annually for inflation. Married couples can contribute twice as much as singles (or their earned income, if less), even if one spouse isn't employed outside the home. Depending on your individual circumstances, you may be able to deduct part or all of your IRA contributions on your federal income-tax return.

All investment earnings in your IRA compound on a tax-deferred basis. You pay tax on your earnings and any deductible contributions when you withdraw the money from your account. Any withdrawals you make before age 59½ may be subject to a 10% early withdrawal penalty in addition to income tax.

Roth IRAs. Roth IRAs are a variation of the traditional IRA that offer an opportunity for tax-free, rather than tax-deferred, investment earnings. Roth IRAs are subject to the same contribution limits as traditional IRAs. Contributions are not deductible, but you generally have access to them at any time. After you've had a Roth IRA for at least five tax years, you can withdraw investment earnings tax free if: (1) you are at least age 59½, (2) you make the withdrawal in a year you pay qualified first-time home buying expenses up to $10,000 (lifetime cap), or (3) you become disabled. After the five-year waiting period has been met, distributions from the account to your beneficiaries or estate at or after your death also would be income-tax free. A traditional IRA can be converted to a Roth IRA if certain requirements are met. Other rules and an income-based phaseout apply. See us for more information.

Annuities. Annuities are another tax-deferred way to save for retirement. While contributions to annuities are not deductible, the annual earnings on the annuity's investments are tax deferred. When you buy an annuity, you enter into a contract with a life insurance company. The company agrees to make payments to you and/or your beneficiary over your lifetime(s) or a set period, usually beginning at retirement. If you die before payouts begin, a death benefit is payable to your beneficiary.

As with most other tax-deferred savings plans, you will have to pay federal income tax on any earnings you withdraw from the annuity during retirement or before, and withdrawals before age 59½ may be subject to the 10% early withdrawal penalty. Also, surrender charges may apply if funds are withdrawn before the contract's surrender period has expired.

Self-employed Plans. If you are self-employed, you have other alternatives for building a tax-deferred retirement fund, such as a Keogh plan, a Simplified Employee Pension (SEP), or a SIMPLE (Savings Incentive Match Plan for Employees). Contributions to these plans (within tax law limits) and any earnings on the plan investments are not taxed until distributed from the plan. Your plan also must cover any eligible employees you may have. Other tax law restrictions apply. Check with us for more details.

Click here to read "Keeping Assets in the Family."

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Estate Planning

Estate planning starts with a Will. If you die without a Will, you lose the privilege of choosing how your assets will be distributed. Instead, your state's intestacy law will decide to whom your assets will be distributed and the amount each person will receive. You also give up the right to choose an executor (or personal representative) to settle your estate or a guardian for your children. A state court will choose an administrator and guardian for you. And, without a Will, you can't take advantage of certain planning opportunities that can reduce taxes and protect your assets for your family.

Married people often think that a simple Will that leaves all of their assets to their spouses is an adequate estate plan. Usually, it's not. Such a Will can pave the way for a substantial federal estate-tax bill at the death of the surviving spouse. In addition, a simple Will can't address concerns you may have about how well your heirs will be able to manage your assets or what may happen to your business after your death. So, in addition to a Will, you may want to include other planning strategies in your estate plan.

Testamentary Trusts. A trust established in your Will can provide asset management for your family after your death. You also may be able to use a testamentary trust to reduce estate tax on your and your spouse's estates and to give your spouse income for life while ensuring your children will receive your assets at your spouse's subsequent death.

Life Insurance Trusts. Most people do, and should, own life insurance. Owners of family businesses often use life insurance to provide family members with the cash needed to pay estate tax without having to sell part or all of the business. Earlier, you checked to make sure you have sufficient life insurance coverage on your life for family members to maintain their current lifestyle after you're gone. If you have a substantial amount of life insurance, you may want to create a life insurance trust to help beneficiaries manage the proceeds and potentially reduce estate taxes.

Charitable Trusts. Gifts to qualified charities can provide income-, gift-, and estate-tax savings, as well as help further the work of organizations you believe in. Using a charitable remainder or charitable lead trust to make lifetime gifts can give you a current income-tax deduction in addition to removing assets from your taxable estate, thus reducing estate taxes.

Other Lifetime Gifts. A well-planned program of lifetime gifts to family and friends can save estate and gift taxes, preserve more of your assets for your family and other heirs, and ensure your property goes to the people you want to have it. Each year, you can give any number of people up to $10,000 each in assets ($20,000 if your spouse joins in the gift) without triggering any gift- or estate-tax consequences. This annual exclusion is adjusted for inflation. Making gifts of appreciating property to family members now may significantly reduce the amount of assets subject to tax later.

(Click here to read Is It Time For An Estate Plan Review.")

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