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A complete financial plan should suggest how to allocate funds across your accounts at any given time in your lifetime. This includes accounts that make up your taxable, college and retirement account groups. Qualified financial and tax planners can help you make these selections.
Fundamental to selecting the right accounts is knowing when funds are needed based on the timing of expenses in your financial plan. For immediate expenses, funds should be in safe checking or savings accounts. For funds you don’t need until later in your plan, you should favor higher earning investments ranging from safer government bonds to growth stocks.
FarPlanner provides a rough forecast of your finances, and can suggest which accounts to allocate funds into throughout your plan, based on:
- The actual financial information you import, and
- The planning ‘trackers‘ you add to your plan (mimicking income/expense cash flows and account balances into the future), and
- The account allocation choices you decide based on the timing of your plan’s trackers’ expenses.
For that last point, The next sections focus on how to make these allocation choices.
Choosing Your Cash Allocations
You should have at least one cash account (e.g., checking, savings) in each of your taxable, college and retirement account groups. FarPlanner is most opinionated on your safe allocations, and suggests using only cash accounts for the 0 to 6 months out allocations. FarPlanner then works to ‘stage’ funds you need into these cash accounts from the non-cash ones. Your cash-cushion funds are earmarked into these cash accounts as well.
The next section focuses on non-cash allocations more than 6 months into the future.
Choosing Your Non-Cash Allocations
FarPlanner does not suggest specific non-cash allocations, but it can help you plan using a variety of allocation strategies as follows, from least ‘hands on’ to most (click links to see more information on the approach):
- Expert ‘hands-off’ approach: Simply entrust all allocation decisions to your qualified financial and tax planners. FarPlanner might still be useful as a way to convey your future plans to your experts.
- Hybrid two-account approach: Use FarPlanner to suggest where to put your safer cash funds (e.g., checking and savings accounts). Use financial/tax planners for the riskier investment allocation choices
- Cash/Lifecycle two-account approach: Use FarPlanner to suggest allocations across safer cash funds and lifecycle funds. Lifecycle funds auto-shift funds between bonds and stocks based on a target retirement age
- Three-account approach: Use FarPlanner to suggest allocations across a cash fund, a bond fund, and a stock fund. This is likely the best ‘hand-on’ approach for most users.
- Business-cycle timing approach: Use FarPlanner to suggest allocations across several sector funds based on economic business cycle timing. You must be willing to stay abreast of current economic conditions and shift between sector funds accordingly.
- Market / Day-Trading timing approach: FarPlanner does not directly support day trading! However, using the two-account approach above might let you protect your plan’s needs in cash accounts. The other account can show funds available for your riskier stock market bets made outside of FarPlanner. Note however that FarPlanner will not be able to estimate the tax hit from your stock bets!
You can change strategies in FarPlanner at any time, quickly re-simulating to see the impact on your long range forecast. You can also pick different strategies for your different account groups.
Income Strategies
Alongside the allocations options above, you and your expert advisors might decide to use pensions or annuities for guaranteed income streams for retirement. FarPlanner simulates your annuity income flows alongside your modeled tracker expenses, income and account balances, for a comprehensive forecast of your finances.
Likewise, you and your experts might wish to add real-estate investing and rental income to your plan. FarPlanner does allow you to model many aspects of real-estate investing, including adding expenses, hard-money / conventional loans, and asset appreciation. However, the simplistic tax engine doesn’t consider tax benefits such as depreciation and deductible expenses, so requires a bit more manual effort for an accurate forecast. A real-estate investor pack for FarPlanner is planned however.
Download FarPlanner for free today, to build your own private discrete FarPlanner plan and gain insights of what your financial tomorrow might look like, decades into the future.