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In my last blog post I talked about the nine things you need to know before you can retire comfortably. Make sure to check out the link and read that blog post when you get a chance, there is a wealth of information in it. There is a lot to think about when it comes to planning your financial freedom. I just want to quickly run down the list of those nine things here so we’re all on the same page.
1. What is your net worth today?
2. Where is all your money going to come from?
3. What are your retirement expenses going to be?
4. What is your debt management plan?
5. What does your base plan look like?
6. What are the “what if” scenarios?
7. What kind of planning are you doing?
8. What about risk management?
9. Are you planning for how your estate will be distributed?
Today I want to go back and take a closer look at number seven on that list above. We want to look at the kind of planning you’re doing.
There are two different types of planning: there’s goals based planning and cash flow based planning. The two types of planning are used at distinctly different times.
GOALS BASED PLAN
So, for example, if you have a long period of time between now and when you plan to stop working, that’s where we would use a goals based plan. It’s basically when you say to yourself, “what do I need to do today so I can stop working at age 65 with a certain level of income?” The goals based plan answers that question.
Goals based financial planning provides you with a clear idea of what you need to do to retire at a certain age with a certain level of income.
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Also read:
9 Things You Need To Know Before You Can Retire Comfortably
Financial Goals Vs. Financial Objectives
Why Your Financial Plan is missing the Mark (And How You Can Fix it)
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Cash Flow Based Plan
A cash flow based plan takes into account a different set of variables and it answers the question, “what type of cash flow can I expect after I leave the work force?” We’re no longer focusing on a long term accumulation goal but focusing on a cash flow goal.
Cash flow based financial plans do a much better job of mimicking your actual income when you reach financial freedom and the taxes associated with the cash flow received from your plans.
One of the biggest differences between the two plans comes down to taxes. If you go ahead and use a goals based solution to answer a cash flow based plan you are going to be way off the mark. The main reason for that is taxation. With goals based planning you’re assuming an average tax rate over the life of the plan but with a cash flow based plan you need to take a look at the tax on the cash flow every given year.
Don’t forget a financial advisor can help if you have any questions about what kind of plan you’re using now or should be using. Remember, the goal of any financial plan is to reach the desired finish, no matter what the finish line is. Only you can decide the finish line that is best for you but a financial advisor can help you along the way, help you decide what questions you need to ask and help you answer those questions. Be sure to check out my guide called “How to Choose and Work with a Financial Planner You Can Trust” to help you find someone who fits with you to help you map your path to financial freedom.
