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  • Writer's pictureAndrew Cremé

How to Write a Simple Financial Plan with Example

Updated: May 31, 2023

laptop and note book on a desk with a financial planning chart

A financial plan is a projection that helps you to see where you are today, and if you follow some course of investments and growth, it will help you to project what kind of lifestyle you will be able to afford in the future.

The kind of financial planning we utilize is based on software that allows us to put in multiple goals and variables and it runs multiple trials to give a statistical analysis on the probability of outcomes. That is not what we are doing here, but merely giving you the basics of putting a simple plan together.

Step 1) List out all of your investments, how much is in them, and what kind of investment returns you believe you can get from them.

Step 2) In the next section, determine how much you are adding to those accounts each year. Keep in mind that if you are maxing out an account, the limits slowly increase over time.

Example Step 1 & 2:

Jim’s 401k - $150,000, 7% yearly growth, $15,000 yearly additions

Cheryl’s Roth IRA - $47,500, 8% yearly growth, $7,000 yearly additions

(Assuming 50 years or older)

Cheryl’s SEP IRA - $180,000, 6% yearly growth, $22,000 yearly additions

Step 3) Calculate Inflation – typically around 2.5% but you can choose what you think is correct.

Step 4) Calculate the “Real” Rate of Return. This is where you take the investment return and subtract out inflation so that you are using today’s dollars in your calculations.

Example Step 4:

Jim’s 401k - 7% yearly growth – 2.5% inflation = 4.5% real rate of return

Cheryl’s Roth IRA - 8% yearly growth – 2.5% inflation = 5.5% real rate of return

Cheryl’s SEP IRA - 6% yearly growth – 2.5% inflation = 3.5% real rate of return

Step 5) Determine the number of years you have until retirement. Many people aim for 65 so that they are eligible for Medicare; however, 67 is when you may qualify for your full social security benefit and some people aim for that.

Step 6) Use Excel or a financial calculator to figure out how much money you will have available to you after the number of years until retirement.

Example Step 6:

Jim’s 401k - 4.5% real rate of return; $150,000, $15,000 yearly additions

Cheryl’s Roth IRA - 5.5% real rate of return; $47,500, $7,000 yearly additions

Cheryl’s SEP IRA - 3.5% real rate of return; $180,000, $22,000 yearly additions

10 Years to Retirement.

Future values of:

Jim’s 401k - $417,000 | Cheryl’s Roth IRA - $171,264 | Cheryl’s SEP IRA - $511,998

Step 7) Calculate any income sources in the future. If you are going to retire at 65 and take a pension at that age, what amount will that be? The same goes for Social Security. For this example, we will assume that Cheryl and Jim are going to get $48,000 per year from Social Security benefits.

Step 8) Figure out how much you can withdraw from your investments each year. There’s a lot of research on it, but if you want a general number you can use a 4% withdrawal amount. What this means is that if we take 4% or less of the balance out each year, you can most likely make it through retirement with an income.

Example Step 8:

Jim’s 401k - $417,000 x .04 = $16,680

Cheryl’s Roth IRA - $171,264 x .04 = $6,850

Cheryl’s SEP IRA - $511,998 x .04 = $20,479

Step 9) Add together all income streams from investments and income sources such as Social Security. For this couple, they would have $37,159 a year in fully taxable income; $6,850 a year in tax free income; and $48,000 in partially taxable income. Because we used an inflation adjusted return on the investments, this couple could decide if living on approximately $92,000 before taxes would allow them to live the kind of life they would like in retirement.

Step 10) Determine Success. If, after running your numbers, you feel that you will have enough and you feel comfortable with everything – success! If, on the other hand, the numbers aren’t quite where you want them to be, you should consider evaluating some of the areas that you can control. For example, investment selection, Social Security timing on when to take it, or pensions, date of retirement, etc.

As you go through this exercise, please feel free to reach out with any questions or if I can help you on anything. While this is one way to go about planning, the method we prefer is to not only give you a number to live on, but to walk through the goals you have and design a plan aimed to help reach all of them.

The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance does not guarantee future results. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. These calculators are hypothetical examples used for illustrative purposes and do not represent the performance of any specific investment or product. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk of loss. Actual results will vary.

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