Practicing financial planning for professionals and CFP(R) aspirants

Evensky xxiPreface to the Twelfth Edition xxiii Acknowledgments xxv About the Authors xxvii Chapter 1 Emerging Role of the Financial Planner 3 Chapter 3 Time Value of Money: The Univers

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Professor and Chair of Economics, School of Business Administration

Oakland University, Michigan

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Financial Analyst at Evensky & Katz/Foldes Financial Wealth Management

Honorary Academic Consultant

President, Evensky & Katz Wealth Management

Former Chairman, CFP ® Board of Standards

All rights reserved No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without permission in writing from the publisher.

First published in 1990 by Prentice Hall

This edition is published in 2016 by

SAGE Publications India Pvt Ltd

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Mathura Road, New Delhi 110 044, India

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London EC1Y 1SP, United Kingdom

SAGE Publications Asia-Pacific Pte Ltd

Foreword by Harold R Evensky xxi

Preface to the Twelfth Edition xxiii Acknowledgments xxv

About the Authors xxvii

Chapter 1 Emerging Role of the Financial Planner 3

Chapter 3 Time Value of Money: The Universal Tool 48

Chapter 4 Life Insurance: Structure, Concepts, and Planning Strategies 85

Chapter 5 Health, Homeowner’s, Automobile, and Liability Insurance:

Chapter 6 Cash Management, Savings, Credit, and Debt Planning 253

Chapter 8 Investment Products and Markets: An Introduction 333

Chapter 9 Investment Management: Concepts and Strategies 382

Chapter 12 Tax Planning: Concepts and Strategies 505

Chapter 13 Basic Structure of Retirement Income 539

Chapter 14 Retirement Planning: Concepts and Strategies 588

Chapter 16 Estate Planning: Concepts and Strategies 657

Comprehensive Financial Plan 715

Chapter 18 Divorce: Financial Planning Implications 729

Chapter 20 Planning for Nontraditional Families 766Chapter 21 Management of Financial Planning Practice 785Chapter 22 Sale of Financial Planning Practice 801

Foreword by Harold R Evensky xxi

Preface to the Twelfth Edition xxiii Acknowledgments xxv About the Authors xxvii

Introduction 48

Annuity Due: A Refinement 60

Cash Management, Savings, Credit, and Debt Planning 69

Chapter 4 Life Insurance: Structure, Concepts, and Planning

Strategies 85

Section I: Risk Management 85

Introduction 85

Section II: Individual Life Insurance Policies 91

Introduction 91

Section III: Life Insurance Planning for the Individual 119

Introduction 119

Section IV: Business Uses of Life Insurance 136

Introduction 136

Section V: Life Insurance Needs: A Real World Example 146

Section VI: Miscellaneous Life Insurance Issues 150

Appendices 157

Chapter 5 Health, Homeowner’s, Automobile, and Liability

Insurance: Structure, Concepts, and Planning 165

Section I: General Principles 165

Introduction 165

Introduction 168

Policy Selection: The Ideal Health Insurance Company 192

Section III: Disability Income Insurance 194

Introduction 194

Disability Policy Selection 201

Section IV: Long-term Care Insurance 205

Introduction 205

Disability-to-long-term-care “Conversion” Policies 214

Section V: The Home Owner’s Policy 216

Introduction 216

Appendix 249

Cash Management and Educational Planning 251

Chapter 6 Cash Management, Savings, Credit, and

Introduction 253

Section I: Net Worth and Cash Management Planning 254

Section II: Systematic Savings Planning 265

Section III: Credit and Debt Planning 282

Bankruptcy 291

Introduction 295

Instruments of Educational Investment Alternatives 309

Reduction of College Debts 325

Advantages and Disadvantages of Fund Investment 343

Section III: Traditional Index Funds 357

Exchange-traded Funds Compared to Closed-end Funds 363

Section IV: Variable Annuity and Life Investment Products 367

Section V: Sophisticated Investment Products 373

Section I: Fixed-income Securities 382

Section III: Theory of Portfolio Construction 413

Introduction 413

Appendix 432

Chapter 10 Investment Planning Strategies 441

Section II: A Real World Investment Plan 463

Section I: The Basic Tax Structure 473

Introduction 473

Section II: Computation of Income Tax 495

Section III: Real World Federal Income Tax Calculations 502

Introduction 505

Section I: The Individual Taxpayer 505

Deduction 506Diversion 511Deferral 516

Section III: Personal Retirement Plans 582

Introduction 588

Section I: Retirement Income Needs Analysis 590

Section II: Distribution from Qualified Plans 596

Introduction 596

Section III: Retirement Income: The Ultimate Decision 603

Introduction 603Annuity, Lump Sum, or Rollover: A Taxing Decision 609

Section IV: Retirement Planning Strategies 612

Planning for Retirement: Additional Considerations 617

Introduction 625

Section I: An Overview of Estate Planning 627

Introduction 638Trusts 640

Section III: Computation of Estate Tax 645

Section II: Sophisticated Estate Tax Reduction Strategies 679

Disclaimer 689

Grantor Retained Annuity Trust and Grantor Retained Unitrust 689

Installment Sales and Self-canceling Installment Notes 692

Recapitalization 696

Section III: Estate Preservation and Distribution Strategies 699

Probate 700

Section IV: Miscellaneous Estate Planning Issues 704

Section V: A Real World Estate Plan 712

Introduction 729

Section I: Post-divorce Planning Priorities 730

Section II: Process of Divorce: Negotiation and Settlement 742

Chapter 21 Management of Financial Planning Practice 785

Index 815

Query: Is it considered plagiarism if you quote yourself? I hope not because I plan

on doing just that When Sid asked me if I would once again consider writing the

foreword to the latest edition of Practicing Financial Planning: For Professionals

and CFP® Aspirants, I was truly honored and instantly said, “Yes.” Having read and

used multiple past editions and written a number of prior forewords I thought the project would be a slam dunk However, when I started to write I realized that

so much of what I’d written earlier still captured my current feelings So I decided

to incorporate some of those earlier thoughts in my current comments

FROM THE 10TH EDITION

“A number of years ago I had the privilege of writing the Foreword to one of the

classics in Financial Planning, Practicing Financial Planning, A Complete Guide for

Professionals As I wrote at the time, the creator of this classic, Sid Mittra was one

of the profession’s pioneers However, past tense does not fully capture Sid’s contributions, for like the Energizer Bunny, Sid continues to lead.”

And the Energizer Bunny hasn’t slowed down—Sid continues to lead

“One thing has not changed As with earlier editions, PFP is an indispensable

resource for new and aspiring planners; however, it also remains, as I noted in

my earlier Foreword, ‘an invaluable educational reference when facing an issue only infrequently encountered and a handy technical reference when the little gray cells simply refuse to recall that last bit of detail necessary to finalize a

re commendation Finally, the innumerable and elegantly presented tables, graphs and flow charts are powerful tools when used in conjunction with clients’ continuing education.’ Correction! It has changed, it’s even better!”

And once again, the current version is even better (i.e., Southern speak for incredibly good)

In my past Forewords I was frustrated with my inability to convey the scope and depth of the text, so this time I decided to provide some specifics to give you a flavor for how you might use this amazing text

• Looking for what elements you should include in an engagement letter? Check out Chapter 2

• Need to update your time value of money knowledge—Chapter 3

• You may be familiar with PPOs and HMOs but how about EPOs and POSs and the taxation of health care benefits—Chapter 5.

• Need to explain to a client why they might consider a 529 instead of a UGMA/UTMA—Chapter 7

• Do not remember the difference between active and passive income or brush up on deflection and diminution tax strategies?—Chapter 12

• Retirement income is a hot topic so you better be familiar with thrift plans, ESOPs, and stock bonus plans—Chapter 13

• Of course you may have a need to explain to your client the differences between QTIPs, ILITs, and FLPs—Chapter 16

• And, I have not even mentioned the special topic chapters on divorce planning, planning for widows, planning for nontraditional families and the management and sale of financial planning practices

I think you get the point If there is an issue you’re unfamiliar with you’ll find the answer here If there is a subject you need to brush up on, you’ll find the answer here If there is a subject you’d like to explain to your client, you’ll find the answer here In fact, I think I’ll recommend that the next revision be titled “You’ll Find the Answer Here.”

I’ll conclude with my closing comment for the 11th edition as it remains so very true today

“If you are a financial planner, wealth manager, financial advisor, student of finance, or a professional servicing the needs of planners, Sid’s work belongs on your desk within easy reach I know you’ll enjoy and benefit from Sid’s masterful work, as will your clients.”

Harold R Evensky, CFP®

Chairman, Evensky & Katz Former Chairman, CFP® Board of Standards Inductee, Movers & Shakers Hall of Fame

In 1990, we published the first edition of Practicing Financial Planning: A Complete

Guide for Professionals We dreamed then that by the time we entered the 21st

century, the financial planning profession would be perceived as venerable as the medical profession We believe we have come close to fulfilling that dream

A leading textbook on personal financial planning must have the depth, the breadth, and the technical sophistication needed to prepare financial planning professionals for meeting the challenges of the 21st century As has been the case with previous editions, in preparing the 12th edition, we felt that no one person, no matter how competent or technically oriented, could satisfactorily produce such a textbook Consequently, we have continued our long- established, nontraditional policy of publishing a collaborative textbook

Like its predecessors, the 12th edition is truly a multiauthored book In fact, all of

the professionals who graciously participated in this exciting venture, ally and collectively, have elevated it to a much higher professional and practi-cal level than otherwise we could have imagined Actually, these professionals have helped expand its coverage, improved its clarity, and added new dimen-sions suitable for addressing the special financial problems of our time

individu-The 12th edition is a vastly expanded version of its predecessors individu-The following list highlights the new and revised features of the current edition:

1 All materials, no longer relevant or important, have been deleted

2 All chapters have been updated up to 2016

3 In every chapter, new material has been added capturing the ments that have taken place between 2012 and 2016 This includes new laws, new methods of operation, and new techniques developed in the last few years

develop-4 In Chapter 17, the old comprehensive financial plan has been replaced by

a new plan It is more representative of the current economic and cial conditions

finan-5 For people planning to use it to prepare for passing the CFP exam, the textbook has been carefully revised and updated to make it more user-friendly and relevant

6 The instructor’s manual has been completely overhauled representing the pedagogical approach favored by instructors New and more chal-lenging exam questions have been added.

7 In publishing this edition, suggestions/criticisms/comments made by instructors over the years have been taken into account

8 Experts from the key financial planning fields (budgeting, insurance, investment, retirement, taxes, estate planning, and planning for nontradi-tional families) have actively collaborated in revising, updating, and improving the overall quality of various chapters This is a novel and key feature of the textbook since its inception

We especially thank Harold R Evensky for writing the foreword to this edition

Finally, an exciting eBook is in the offing as an additional reading material bearing wide range of articles on the art of practicing financial planning and the art of client communication Divided into two sections, the eBook includes contributions from the “who’s who” of financial planning and Carl Richards, the NY Times “sketch guy” who with simple back-of-the-napkin drawings explains basic and planning concepts (great for use with clients) To learn more about availability of the eBook please contact marketing @sagepub.in

We live in a dynamic world in which tax laws, emergence of new financial ucts, and financial rules and regulations continually change, often in unpredict-able ways We all recognize that these changes will not come to a screeching halt the day our textbook goes to press So, to keep our instructors abreast of the latest developments, we pledge to regularly update our website by publish-ing important changes taking place in the world of personal financial planning

prod-We conclude with a philosophical expression of hope The controversy of whether financial planning is merely a career or a bona fide venerable profes-sion has come a long way toward a resolution in favor of the latter interpreta-

tion And if Practicing Financial Planning: For Professionals and CFP® Aspirants

helps us continue our journey toward our final destination, we will have achieved our objective

Brian Fischer

To say that this book is the product of efforts solely by the lead author or by the three coauthors would be a gross understatement Several people have contrib-uted to this book in so many ways that it is difficult to adequately acknowledge each

Gregory Bresiger

Mr Bresiger is a business and political writer in prestigious publications such as

the New York Post and Financial Advisor He has also written for dozens of

web-sites including Mises.com, FreedomToday, a publication of the Future of

Freedom Foundation, and the Journal of Private Enterprise He also has his own

blog, GregoryBresiger.com That is why we were pleasantly surprised when in the name of professionalism he offered to edit our 800-page textbook, accept-ing very little financial compensation The quality of his editorial work can be fully appreciated by comparing the “before” and “after” versions of the manu-script Equally impressive, he completed this monumental task in record time, often neglecting his own professional commitments and sacrificing financial gains, a rarity in our profession

Harold R Evensky

It is our privilege that Harold Evensky chose to be associated with the tion of the 12th edition of our text Mr Evensky’s credentials are well known Morningstar CEO Don Phillips describes him as the Dean of Financial Planning

publica-He is acknowledged as one of the top fee-only financial planners in the country Evensky’s legacy to the industry is seen through his personal appearances to advise multiple organizations and his development of codifying successful practice style through literary works He has addressed conferences throughout the USA, Canada, Europe, Australia, Asia, South Africa, and the UK

Evensky has acted as the Honorary Academic Consultant for our textbook, advising us at multiple levels And, despite his incredibly busy schedule, he pro-vided us whatever help we needed to achieve our objectives

As with previous editions, Evensky has graciously written the foreword to the 12th edition of our text.

SPECIAL CONTRIBUTORS

Like its predecessors, the 12th edition is truly a multiauthored book In fact, all of

the professionals who graciously participated in this exciting venture, ally and collectively, have elevated this text to a much higher professional and practical level than would otherwise be possible Indeed, these professionals have helped expand the book’s coverage, improve its clarity, and add new dimensions suitable for addressing the special financial problems of our time

individu-We express our gratitude to the following professionals (presented cally) who generously contributed their time and talent to enrich various topics covered by the textbook: Alexandra Armstrong, CFP; Anton T Vanek, Jr, ChFC, CLU; Brian Fischer, CFA; Cedric L McSween, Sr, David C Fillo, CEBS, RPA, QKA, QPA, ChFC, CLU, CBC;  Dianne Van Daele, QKA, QPA, MSBIT; Elizabeth A Bawden, Jack DiFranco, Jeffrey Kirkman, AIF®; John J Giarmarco, JD, LLM; Joseph Pia, CPA,

alphabeti-JD, and LLM (tax); Matthew Weaver, JD; and Sara M Dolan, CPA, MBA

SAGE (INDIA) PUBLISHERS

We would be remiss if we did not single out two individuals at SAGE who, ing all odds, played a major role in getting this book published by shrinking the publication date by an unprecedented 12 months Mr Vivek Mehra, CEO and Managing Director, played a significant role in laying the foundation for its early publication, and making it possible for its availability in the fall of 2016 Once that decision was made, Mr Amit Kumar, our book’s editor, gracefully accepted the challenge He went through numerous hurdles to publish our book in record time

defy-Sid Mittra holds the title of Emeritus Professor of Finance at Oakland

University He was a member of the CFP Board (formerly the

International Board of Standards and Practices of Certified Financial

Planners or IBCFP) He has been regularly invited to offer seminars at

the World Congress of the International Association for Financial

Planning including those in Japan and Australia

Mittra is in several prestigious listings, including “International

Authors’ Who’s Who,” “American Men of Science,” and “Who’s Who in

Finance and Industry.” Also, he has published 16 books, including

Practicing Financial Planning: A Complete Guide for Professionals (now in 12th

edi-tion) The text (retirement) won the Axiom Business Book Awards The text rently enjoys wide acceptance among top universities and trade associations, and in 2015 an Indian version of the text was published by a prestigious interna-tional publishing company

cur-Mittra uniquely combines conceptual and theoretical knowledge in financial management with communicative skills He frequently speaks on financial eco-nomics, and money and financial management He also advises corporations, partnerships, and closely held corporations in financial matters

Consumers’ Research Council of America has honored Dr Mittra as one of the Top Financial Planners in the United States The City Council of Detroit has awarded him the Spirit of Detroit Award in recognition of his long and distin-

guished service to the city Mittra is also widely quoted in the Money Magazine,

Kiplinger’s Personal Finance Magazine, Financial Advisor, and various other

mag-azines and newspapers For many years he published a weekly newspaper

arti-cle on personal financial planning topics for The Oakland Press (MI) and The

Macomb Daily (MI) His professional articles have appeared in the Journal of Accountancy, Financial Planning, Journal of Financial Planning, Personal Financial Planning, and American Economic Review.

Anandi P Sahu is a Professor and Chair of Economics at the School

of Business Administration, Oakland University, Michigan He obtained an MA and a Ph.D in economics from Washington University

in St Louis in 1985 He has concentrated his research efforts in three fields: macroeconomics, monetary theory, and finance

Dr Sahu has published numerous articles in scholarly and sional journals His journal publications include articles in the

profes-Southern Economic Journal, Financial Services Review, Quarterly Journal of Business and Economics, Review of Business and Economic Research, Eastern Economic Journal, Journal of Economics and Finance, Journal of Applied Business Research, Public Finance Quarterly, AAII Journal, and Personal Financial Planning He is also a coauthor of four books: The Economic Legacy of Reagan Years: Euphoria or Chaos? (1991), Defense Spending and Economic Growth (1993), Understanding Macroeconomics (2006), and Practicing Financial Planning for Professionals (2007) He is also the author of An Agenda for

a Great America (2008)—a book on long-term US public policy.

Brian Fischer is a Financial Analyst at Evensky & Katz/Foldes Financial

Wealth Management in Coral Gables, Florida He graduated with a Bachelor of Science in Finance from the University of Illinois at Urbana–Champaign and a Master of Science in Personal Financial Planning from Texas Tech University He is also a chartered financial analyst

While at Texas Tech, he served as a graduate assistant for multiple courses including cultural and gender diversity in personal finance, risk management, sales and marketing, and client communication and counseling

Prior to joining Evensky & Katz/Foldes Financial Wealth Management, Brian traded interest rates and precious metals commodity options in Chicago and New York Part of that time was spent on the floor of the New York Mercantile Exchange (NYMEX) as an open outcry trader

Introduction to

Financial Planning and Basic Tools

DEMANDS OF THE FINANCIAL FUTURE

The verdict is finally in: The 21st century is undeniably going to be one of the

most underappreciated periods in human history.

On the one hand, life appears to be shooting through with wonder Even the awesome achievements of the 20th century appear pale in comparison: technological marvels, sophisticated communications, artificial intelligence, walk-ing on the moon, probes of faraway planets, and, most amazing of all, cloning life itself Now 50 new planets have been found outside our solar system, one of them orbiting two suns! Then we learn the claim that subatomic particles have shattered

the speed of light This claim, if confirmed, will redefine the word, impossible.

On the other hand, an everything-will-go-wrong mentality pervades the entire

country: fear of living too long, agony of suffering from catastrophic illness, another major depression leading to a collapse of the world economy, wide-spread poverty after retirement, bankruptcy of the Social Security and the Medicare systems, and dethroning of America as the dominant economic power Everyone seems to be besieged by pessimism about life and living

We hope that a statesman will rise up to the occasion and passionately announce that “never has there been a time in history when the average human could live

so long, where food has been as plentiful, where newborns have a better chance

of surviving It’s really hard to think of an important area where things aren’t better: literacy, gender equality, the absence of slavery, the rights of minorities.” (Charles Kenny, Senior fellow, Center for Global Development) Unfortunately,

we do not see such a statesman imploring us to move to a higher plane, no matter how excruciatingly painful the journey might be

This is the environment in which professional financial planners must pledge to assist their clients in achieving goals, operating in an environment of unprece-dented opportunities and fearfully difficult challenges

Emerging Role of the Financial Planner

1

THE EMERGING TRENDS

Changing Family Patterns

The latest data from the US Census Bureau reveal that the ratio of all US households consisting of married couples with children declined from

45 percent in 1957 to 19 percent in 2014 Over the same period, however, single-person households increased from 11 percent to 28 percent Another interesting trend was same-sex couple households for whom we now have reliable data According to the Census Bureau, these households recorded a dramatic increase from approximately 52,799 million in 1960 to 123 billion in

2015, an enormous increase in percentage terms Interestingly, contrary to popular beliefs, they are not confined to coasts!

Where traditional families exist, progressively these are becoming less capable of financially assisting their aging parents and their children The implications are clear In contrast to a society that traditionally buttressed each individual with a network of family support, the 21st century is marked

by an increasing need for individuals taking full responsibility for meeting their own financial goals

The Reality of American Dream

Once taken for granted, the cost of achieving lifetime goals—the proverbial

American Dream—is now is a bad dream Mortgage payments on a home

absorb 28–36 percent of the average 30-year-old’s salary today, compared to just 14 percent in 1949 The expenses associated with having a family are esca-lating as well Family expenses have also risen According to the estimates of the US Department of Agriculture, for a two- parent, two-child, family, the cost

of raising a child born in 1996 through the age of 18 averaged $222,250 for those in the middle income group and 323,964 for those in the highest income group For a child born in 2013, these figures would have risen from $245,340 to

$407,820 The estimate for the middle-income families is also significantly higher than the cost estimated for a child born in 1996 (excluding college) With costs of education rising on average about 8 percent per year—faster than wages or inflation—the pressures put on tomorrow’s parents to save for raising and educating their children can only increase All this must be viewed against the backdrop of falling median household income adjusted for inflation According to the Census Bureau, after adjusting for inflation, median household income dropped 7 percent during 2000–2010

Realities of Retirement

Based on the current trends, an average American is expected to enjoy a longer

retirement period, partly because in America the average life span is lengthening

In 2015, in the USA the average life expectancy was 78.80 years (81.2 years for

women and 76.4 years for men) Biotechnological advances are expected to

stretch life expectancy in the future As a result, the children and grandchildren

of the current generation could live to be 100 or older Another reason for

longer life spans is the trend of early retirement That is the trend of retiring

before the age of 65 A 2015 the Teachers Insurance and Annuity

Association-College Retirement Equities Fund (TIAA-CREF) study1 revealed that nearly half

of the Americans (46 percent) are concerned about running out of money in

retirement Some of this concern may be justified by 39 percent of Americans

who say they are not familiar with their retirement plan investment options—

an increase from 33 percent in 2014

Alarmingly, despite the number of people who are unfamiliar with the

investment options in their retirement plan, the vast majority of respondents

(85 percent) say they feel comfortable with the choices they have made This

gap highlights individuals’ need for advice and education on how to save

enough to create a steady stream of income in retirement

Americans reaching retirement over the past 20 years face their different

retirement problems than their predecessors In response to a significant change

in the retirement environment, since the mid-1980s, retirement patterns have

dramatically changed As a result, another TIAA-CREF study reports that a

century-long trend of American men toward taking earlier retirement has

stopped Figure 1.1 shows that a dramatic decline in the retirement age of

American men has finally stopped and that there was a dramatic decline in the

retirement age through the mid-1980s.2 Figure 1.2 displays a more recent trend

that, since the mid-1990s, the average retirement age has risen from 62 to 64 for

men.3 But does the lengthening of retirement years (ignoring the early

retire-ment issues) guarantees that these will be the golden years? For the majority, the

answer appears to be, not necessarily.

(TIAA-CREF), 2015, New York.

Retirement Age? Center for Retirement Research, Boston College, Chestnut Hill, MA.

Boston College, Chestnut Hill, MA.

Source: Munnell et al., 2015 The Average Retirement Age, an Update Center for

Retirement Research at Boston College, Chestnut Hill, MA

Start of the shift towards defined contribution plans

74 72 70 68 66 64 62 60 1910

1920 1930 1940 1950 1960 1970 1980 1990 2000

Figure 1.1 Average Retirement Age of Men, 1910–2002

Source: Burtless and Quinn (2002); Munnell, Cahill, and Jivan (2003); based on Bureau of

Labor Statistics Data Center for Retirement Research at Boston College, Chestnut Hill, MA

The Bureau of Labor Statistics estimates that 70–75 percent of preretirement income is needed to continue a comparable lifestyle during retirement Based

on that observation, the critical question becomes, “Where will this money come from?” The Social Security System currently (2015) provides a maximum annual benefit of $31,668 for a 66 year old—regardless of the retiree’s prere-tirement earnings That suggests that the creation of a potential gap between retirement dreams and reality is a distinct possibility It can only be bridged by

personal savings and investments So the combination of a shorter working

life span and a longer retirement period makes the goal of a comfortable

retirement more distant

Dramatic Changes in the Retirement Environment

Today Americans reaching traditional retirement ages face a dramatically

differ-ent retiremdiffer-ent environmdiffer-ent than those before the mid-1980s It is a “Brave New

World” for retirees compared to the mid-1980s Here is a list of key structural

changes noted in the TIAA-CREF study that appear permanent:

1 Elimination of mandatory retirement for most American workers

2 Reduction of work disincentives, or retirement incentives, in Social

Security and in employer pension plans

3 A less burdensome work environment owing to technology and

work-place options Living longer and healthier lives means people can

post-pone retirement

4 Gradual increase in the Social Security retirement age from 65 to 67

result-ing in an across-the-board benefit cut

5 Fewer firms offering employer-sponsored post-retirement health insurance

6 Ongoing concerns about the health of the Social Security, Medicare and

Medicaid trust funds

7 The decision to retire in stages, utilizing bridge jobs between full-time

employment and complete retirement

8 The need for new education and retraining meeting the demands of a

changing labor market, a situation older workers progressively find more

difficult

9 Husbands and working wives (on average three years younger than their

husbands, and more of them working) coordinating their retirement If

wives retire at the age of 62 to qualify for the Social Security, that pattern

would push husbands’ retirement age to 65

These changes are a mixed blessing for older workers; they share a characteristic:

They make work after the traditional retirement age more attractive Clearly,

these changes are here to stay

Equally important, as a result of the 2008–2009 collapse of stock and real estate

markets, the mismatch between future retirement-income needs and current

personal savings has become apparent Based on a 2010 Wells Fargo Retirement

Survey, three out of four surveyed feared that they will work in retirement Worse,

some 25 percent would need to work during retirement And approximately

25  percent surveyed indicated that they would have to work until the age of 80

to reach a comfortable retirement Sadly, this is the new retirement “reality” for most Americans today

A Summary View

Current trends suggest that while the future will offer Americans unparalleled opportunities in all areas of life, in order to exploit these opportunities, rather than relying on traditional sources of assistance, individuals will have to assume increasing responsibility for their own financial well-being The process of making the most of one’s money is an intense, long-term endeavor So millions of Americans facing retirement challenges should remember the theme of the great football coach George Allen: “The future is now.” Fortunately, there is help for millions of Americans worried about retirement Professional financial planners, who only four decades ago were practically unknown even to most financial institutions, are now recognized by the general public as invaluable planning partners There is no denying that personal financial planning has come of age and is poised to play a distinct role Personal financial planning can play a big role

CONCEPT OF FINANCIAL PLANNING

The term personal financial planning has been loosely and broadly applied to a

wide range of advisory services and financial products, sales efforts While many financial planning professional organizations have defined the term to foster a unified financial planning profession, the most comprehensive definition has been developed by the Certified Financial Planner (CFP) Board of Standards In its Code of Ethics and Professional Responsibility, the Board presents the follow-ing definition:

“Personal financial planning” or “financial planning” denotes the process

of determining whether and how an individual can meet life goals through the proper management of financial resources Financial plan-ning integrates the financial planning process with the financial planning

subject areas In determining whether the certificant (planner) is

provid-ing financial plannprovid-ing or material elements of financial plannprovid-ing, factors that may be considered include, but are not limited to the:

• Client’s understanding and intent in engaging with the certificant

• Degree to which multiple financial planning subject areas are involved

• Comprehensiveness of the data gathering

• Breadth and depth of the recommendations.4

Financial Planning Process

Financial planning is a process and not a product It may lead to the

recommenda-tion of an investment, insurance, or a legal product Still, a financial planner should

never act as a salesperson whose loyalty is primarily to a financial provider This

kind of faux planner—and let us say there are still a fair amount of sales-oriented

planners in our industry—merely uses life insurance or mutual fund investment as

a panacea for solving all problems This is most definitely not who and what the

certified planner is Instead, he or she uses financial planning the correct way It

should be thought of as a process for helping people This process helps the client

achieve financial goals either through the development of integrated,

compre-hensive planning solutions or through the use of a segmented approach for

solv-ing specific problems It is this skillful use of the process that elevates an individual

to the level of a professional financial planner, a trusted adviser and not someone

trying to make a sales quota by often selling inappropriate products

In its Standards of Professional Conduct, the CFP Board offers the following

defi-nition of the planning process:

“Personal financial planning process” or “financial planning process”

denotes the process which typically includes, but is not limited to, some

or all of the six steps:

• Establishing and defining the client–planner relationship

• Gathering client data including goals

• Analyzing and evaluating the client’s current financial status

• Developing and presenting recommendations and/or alternatives

• Implementing the recommendations

• Monitoring the recommendations.5

The financial planning process and associated job tasks will be discussed at

length in Chapter 2

Washington, DC.