Q&A with Financial Freedom LLC

When it comes to retirement planning, people typically have a lot of questions. And rightfully so. You work hard for your money and you deserve to understand what’s happening with it. So, as president of Financial Freedom LLC, I want to discuss some of our clients’ most commonly asked questions when it comes to retirement planning and asset allocation.

Q: We have heard a lot lately about Monte Carlo simulation as it applies to retirement planning. What is it? And does Financial Freedom LLC use Monte Carlo simulation?

A: In estimating the retirement income that may be available to our clients, we actually use a number of assumptions in the planning process. Some of those are:

• What are the target income requirements during your retirement years?
• What will the rate of inflation be?
• What investment returns will you earn on our portfolio?
• What about longevity? How long will we live?
• How will escalating health care costs impact my plan?

Because the actual results of these assumptions may be different, the potential for uncertain and inaccurate projections exists.

That is where Monte Carlo simulation can be a useful guide. Monte Carlo simulation is a mathematical model that uses probability and statistics to examine the likelihood of particular outcomes. The end result of these thousands of mathematical calculations is to provide guidance on the likelihood of achieving the retirement income and ending portfolio value as projected.

So, yes, Financial Freedom uses Monte Carlo simulation in conjunction with other planning tools to provide effective retirement planning analysis and recommendations.

Ready to discuss your retirement and financial independence? Contact Financial Freedom to learn how we can help.

Q: Does Financial Freedom LLC provide analysis and recommendations with regard to company stock options?

A: Yes, we provide a comprehensive analysis and stock-option recommendations for all of our clients.

Stock options are becoming a more common form of employee compensation in the United States, and in fact, more than 11 million employees in the United States have stock option plans.

The stock option analysis typically includes consideration for effective tax planning; estate planning; asset allocation and diversification; company requirements for ownership of stock; and any “political considerations” that a client needs to consider regarding owning company stock.

Q: Should I establish a fixed asset allocation policy and stick with it?

A: No. We believe the more effective approach to asset allocation involves having a focus on the overall goals and changing needs of the client. Asset allocation is active, not passive! The forces that govern asset class returns include unpredictable economic developments and unpredictable shifts in market psychology. We work very hard to keep up with economic developments and then incorporate those developments into a client’s goals, objectives and specific investment portfolio. We also believe that having an overall comfort level with your asset allocation and asset class investments is very important. We discuss ongoing market risk with our clients in the context of, “How well do you sleep at night?”

What this means is, investment and financial planning solutions should be monitored and adjusted in light of changes in investment opportunities and client circumstances.

Q: If Financial Freedom LLC were to manage my assets, would individual stocks be included in my portfolio, or would it be 100 percent mutual funds?

A: This really depends on the comfort level of the client. We certainly use individual stocks as part of portfolios. With that said, many clients prefer the potential reduced risk and volatility that funds may provide versus individual stocks. The specific breakdown between stocks and mutual funds would be based on each client’s comfort level.

Q: Why is it critical to have a financial roadmap?

A: Having a financial roadmap is all about achieving the great goals of life. And achieving the great goals in life starts with a plan. Without a well-thought-out plan, we’re much less likely to know where we’re headed and when we will get there. A comprehensive financial plan creates the “roadmap” to achieving one’s life goals and objectives. It helps answer questions like:

Goals and Objectives:

• What is really important to me (money, wealth, happiness, family, kids, travel, etc.)?
• What special dreams do I have that I want to achieve before I die?
• Am I successful in managing against an annual or monthly cash flow budget?
• How do I balance spending today vs. saving for tomorrow?
• When do I want to retire?

Retirement Planning

• What annual income do I want in retirement, and how will inflation impact that number?
• How much of a retirement nest-egg do I need to ensure that my spouse and I won’t outlive our income needs, given that one or both of us may live 30 years in retirement?
• Am I currently maximizing my tax-deferred savings (401k, IRA, etc.)?
• What about a Roth IRA or the potential of a Roth conversion?
• Will my employer-provided retirement plan be sufficient?
• What role might Social Security play in my retirement?

Retirement Income Management

• What’s the best way to generate my desired level of income during retirement?
• Which type of asset should I use first – taxable savings, annuities, IRAs, etc.?
• Should I wait until age 70-½ to begin taking distributions from my IRAs?
• How might income “smoothing” help my overall tax situation?

Estate Planning

• What would happen to my family if I died tomorrow?
• Have I adequately protected my family’s standard of living if I die?
• Do I have a current will so that my assets go to the people I choose?
• Have I named guardians for my minor children should I die?
• How do my heirs inherit my money with the least amount of taxation?
• Do I have an updated power of attorney and health care proxy?
• Should I be gifting to family and charities while I am still alive?

Insurance, Risk Management and Risk Reduction

• Do I have sufficient health, disability, liability, homeowner and auto insurance? Should I consider a liability umbrella policy?
• Do I have adequate life insurance to protect my family?
• Should I consider long-term care insurance?
• What would happen if I became disabled and couldn’t work?

Income Tax Planning and Effective Tax Reduction Strategies

• Am I paying the least amount of income taxes possible?
• Am I maximizing my possible deductions?
• Do I have a tax-efficient investment portfolio that is minimizing my taxes?

As you can see, a financial roadmap can be very helpful in creating a full financial plan. When Financial Freedom meets with clients, we also discuss investment planning, asset allocation, wealth accumulation and wealth preservation. We analyze whether our client is getting the most from executive compensation and stock options. We also talk about upcoming costs such as college funding, when appropriate, for children and/or grandchildren.

If you’re interested in developing and implementing a financial roadmap, contact us to see how Financial Freedom can help.