Retirement Planning Storyboard

Gathering Information

This lesson, "Gathering Information," describes the first step of the personal financial planning process,. After completing this lesson, you will be able to:

• Identify key information the individual needs to gather to begin the financial planning process.
• Describe key information the financial planning advisor needs to gather to begin the financial planning process.
• Describe the roles of the individual.
• Describe the roles of the financial advisor.
• Describe key elements in a net worth statement.
• Explain how a net worth statement is used in the financial planning process.
• Describe key elements in a cash flow statement.
• Explain how a cash flow statement is used in the financial planning process.

Key Questions

Goals need a starting point and an ending point. For this example, the person's current financial position is the starting point from which the individuals can measure the progress towards their financial goals. Individuals need a practical means to evaluate their current financial position. Two standard statements provide the basic information needed to begin the financial planning process:

• Net worth statement
• Cash flow statement

The Individual's Role in Financial Planning

The individual and the financial advisor work as a team throughout the financial planning process. After reviewing the roles and responsibilities of the individual and the advisor, we’ll take a closer look at the net worth and cash flow statements.

Typically, the individual’s role during the financial planning process is to:

• Provide financial information to the advisor.
• Define personal and financial goals.
• Prioritize personal and financial goals.
• Ask questions to clarify his or her understanding of financial planning.
• Communicate decisions concerning financial planning issues.

The Financial Advisor’s Responsibility in Financial Planning

The financial advisor’s responsibility is to:

• Explain each step of the financial planning process.
• Help the individual gather information.
• Assist the individual with goal- setting.
• Answer the individual’s questions.
• Incorporate the individual’s decisions into the financial plan.
• Monitor the plan and suggesting revisions as necessary.

The advisor and the individual work closely to develop, implement and monitor the financial plan. Open and honest communication is an essential element of the planning process.

Net Worth Statement

The net worth statement provides a snapshot of a person’s financial situation at a specific point in time. It shows an estimate of assets and liabilities. Net worth is defined as assets minus liabilities or debts.

It is important to complete the net worth statement as a part of the financial planning process. Information from the net worth statement is used to start the financial planning process. The statement is a valuable resource for other aspects of financial planning, such as estate planning and retirement planning.

The two sections of the net worth statement are:

• Assets
• Liabilities

Let’s take a closer look at each section.

Net Worth Statement--Liability Section

The liability section of the net worth statement summarizes the current balances of all the individual’s debts. Examples of liabilities are mortgage loans, credit card debt, and automobile loans.

It is important to assess how much debt a person has and how it is categorized. Debt falls in to one of two categories:

• Tax-deductible debt
• Non tax-deductible debt

Generally, the interest on certain types of debt, such as home mortgage debt, is tax deductible. Investment debt may be partially or entirely tax-deductible. In certain cases, student loan interest may be deductible.

Other forms of debt, known as personal debt, are not tax-deductible.

Cash Flow Statement

The cash flow statement is a necessary part of the planning process. The cash flow statement, in assessing income and expenses, will do three things:

• Indicate the ability to save.
• Show whether a person is living within or beyond his or her means.
• Highlight problem areas.

The cash flow statement provides information that will be used throughout the financial planning process. The cash flow statement includes a summary of income, as well as a detailed break down of expenses.

The next section of the cash flow statement lists all expenses. Expenses can be one of three types: fixed, variable or discretionary.

Fixed and variable expenses:

• Are periodic expenses that are usually paid on monthly, quarterly, semi-annual, or annual basis
• Are generally necessary expenses such as a mortgage or rent payment, insurance premiums, and utility payments.

Discretionary expenses:

• Include the cost of items such as entertainment and travel.
• May be more difficult to quantify, unless they are tracked.