Financial Independence (Getting to Point X): An Advisor's Guide to Comprehensive Wealth Management
From saving to purchase a first car, to putting kids through college to planning for retirement, to preserving your estate for your loved ones, our financial goals change from one stage of life to the next. While those goals and the challenges we face in achieving them may differ, all of them have certain things in common. Saving, budgeting, managing debt, minimizing taxes and living within your means. These are a few of the 10 Key Wealth Management Issues which come into play (to varying degrees) when working toward specific financial goals. But there's one goal for which success relies on all ten keys coming together in perfect harmony: financial independence, also known as "Point X." No matter how you define it—whether it's a retirement income of $25,000 a year, or an estate worth $250 million—your future financial independence requires that you deal effectively with all ten key issues. And now this book shows you how to get it done, along with the guidance of a trusted advisor.
- Supplies you with a complete roadmap for arriving at "Point X," financial independence with key milestones and important twists and turns clearly defined
- Identifies the 10 key wealth management issues and offers priceless advice and guidance on negotiating each on your road to financial independence
- Provides you with both success and failure stories so you can learn from others' real life experiences
- Provides you with tax planning facts and strategies within the wealth management issues that will show you how to minimize your most significant expense and at the same time maximize your savings on the road to your "Point X"
Preface: Living the American Dream xiii
Introduction Getting to Point X xix
Financial Literacy and the New Norm xx
Point X: Our Fundamental Financial Goal xxi
Ten Key Issues to Comprehensive Wealth Management xxii
Our Biggest Expense xxiii
Take a Financial Planning Checkup xxiv
The Power of This Book xxvii
Chapter 1 Committing to Living within Your Means 1
The American Dream Becomes the American Nightmare 1
Living within Your Means: The Essential Step 2
Simple Saving 6
Chapter 2 Understanding Taxes 11
A Brief History of the U.S. Tax System 12
Organizing and Retaining Your Records 15
Tax-Preparation Services 16
Accumulating Wealth through Tax Planning 18
Chapter 3 Determining Your Financial Position 23
Figuring Your Financial Net Worth 24
Case Study: How One Couple Learned They Were Spending More Than They Earned 24
Making Sense of Cash Flow 35
Establishing Your Financial Goals 57
Finding Trusted Advisors 61
Chapter 4 Managing Debt 67
Case Study: How Two Doctors Went Bankrupt in Only a Few YearsWhat Not to Do 67
Basic Principles for Managing Debt 71
Good Debt versus Bad Debt 73
Credit-Card Debt 74
Auto Loans 80
Student Loans 81
Home Mortgage Loans 82
Business and Investment Loans 86
Understanding Credit 87
Your Credit Report and Your Credit Score 89
Preventing Identity Theft 93
Analyzing Your Debt 94
Chapter 5 Insuring Your Health and Life 99
Choosing a Health Insurance Plan 100
Long-Term Care Insurance 111
Disability Insurance 118
Life Insurance 122
Buying Insurance Policies 128
Chapter 6 Protecting Your Property with Insurance 133
Case Study: How a Lack of Insurance Wiped Out One Woman’s Life Savings 134
Homeowner’s Insurance 136
Automobile Insurance 140
Umbrella Liability Insurance 144
Buying Insurance Policies 147
Chapter 7 Paying for College 153
Case Study: How Not Saving for Your Child’s Education Can Ruin Your Financesand Your Child’s 156
Conducting a “Needs Analysis” for Your Children’s College Educations 160
Strategies for Saving Money for College Education 162
Education Tax Deductions and Credits 179
Chapter 8 Planning for Retirement 187
Case Study: Saving versus Not Saving for Retirement: The $1.7 Million Difference 187
Retirement Equation: Calculating Your Personal Point X 191
The High Cost of Waiting to Save for Retirement 193
What You Can Expect to Receive from Social Security 196
Qualified Retirement Plans 198
The Difference between Traditional IRAs and Roth IRAs 203
Fixed and Variable Annuities 209
Retirement Funding: “Needs Analysis” 212
Chapter 9 Managing Your Investments 221
Analyzing Your Risk Tolerance 222
Stocks, Bonds, Mutual Funds, and Exchange-Traded Funds 226
Diversification and Modern Portfolio Theory 234
Asset Allocation and Rebalancing 237
Dollar-Cost Averaging 243
Inflation and Taxes: The Biggest Drains on Investment Return 245
Medicare Surtax on Net Investment Income 246
Chapter 10 Preserving Your Estate 251
The Federal Gift and Estate Tax System 252
Legal Documents to Consider for Estate Planning 252
The Probate and Administration Process and Why You May Want to Avoid It 257
Using a Planned Gifting Strategy 261
Ownership of Property and How It Is Transferred 262
Reasons for Creating a Trust 265
Benefit from a Family Limited Partnership 277
Estate Tax Planning and Life Insurance 278
Chapter 11 The Time Value of Money 285
The Rule of 72 286
Appendix A: Selecting a Trusted Advisor 301
Appendix B: 101 Ways to Save $20 or More per Week 311
Appendix C: Basic Concepts and Definitions of Various Types of Taxes 321
About the Author 341
JOHN J. VENTO is the President and CEO of the certified public accounting firm, John J. Vento CPA, P.C., and the certified financial planning firm of Comprehensive Wealth Management, Ltd. Mr. Vento is a New York State Certified Public Accountant (CPA), holds a Master of Business Administration (MBA) in Taxation, and is a Certified Financial Planner (CFP). Today, after nearly three decades, Vento's practice concentrates on servicing more than 200 small-to-midsize businesses, and more than 1,000 individuals. His organization is focused on professional practices, high net-worth individuals, and those committed to becoming financially independent.
John has been ranked among the most successful advisors of a nationwide investment service firm and has held this distinction since 2008. He has been an adjunct professor at St. Francis College as well as Wagner College. He has been the keynote speaker at various seminars and conferences throughout the United States that focus on tax and financial strategies that create wealth. He also lectures on investing and financial planning throughout New York City as part of the New York Public Library's initiative on financial literacy.
Journey to Point X (Financial Independence):
Ten Steps to Get You and Your Finances Where You Want to Go
Financial independence is the point at which you stop working for your money and your
money starts working for you. John Vento provides ten steps to help get you there.
As a result of the 2008 economic meltdown, it became stunningly obvious that many Americans had not managed their finances well. What we learned as the economy slipped into a Great Recession was that many people lived paycheck to paycheck. Many had mortgages they couldn’t afford. Many took unnecessary investment risks. And far too many weren’t saving a dime let alone putting money away for their kids’ college or their own retirement. Financial advisor John Vento says it’s time for Americans to get their financial houses in order. He says everyone should make reaching financial independence—or their Point X, as he calls it—a top priority.
“Financial independence isn’t something that’s just for wealthy people,” says Vento, president of his New York City-based Certified Public Accounting firm, John J. Vento, CPA, P.C., and Comprehensive Wealth Management, Ltd., as well as the author of the new book Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management (Wiley, 2013, ISBN: 978-1-1184-6021-4, $40.00, www.ventocpa.com).
“And it’s not something that’s guaranteed just because you’re a top earner.Financial independence, orPoint X, is literally and fundamentally the point at which we can stop working for our money and our money starts working for us. It is the spot at which our savings and investments alone generate enough income to support our chosen lifestyle, and allow us to continue to live that lifestyle without having to work for a paycheck. It is the place where we have achieved true financial independence.”
A CPA and CFP® with decades of experience, Vento knows exactly what it takes to sustain and build wealth. His new book is a complete resource for anyone concerned with building wealth and financial security in today’s no-guarantee financial environment. Authoritative, comprehensive, and up to the minute, it is an essential financial guide for every individual and every family.
“Of course, no one—not even the super wealthy—can just snap their fingers and reach financial independence,” notes Vento. “No matter how you define your particular Point X, whether it is an annual income of $25,000 or an estate of $250 million, you need to not only understand but effectively deal with ten fundamental wealth management issues.
“Throughout our lives, we will encounter many questions and problems relating to money, but every one of them will fall, in some way, under one or more of these ten key wealth management issues. It is important that you understand them and work within them productively—that you become financially literate.”
To that end, Vento covers each of the ten key wealth management issues in great detail in his new book. Read on for an overview of each one of them:
Live within your means. “Living within your means” is living on less than your take-home salary and any other resources you receive, such as income from an annuity or a trust.Living within your means does not mean existing from paycheck to paycheck.Living within your means does not mean living on credit or on loans. Living within your means does not mean turning to parents or friends to pay the tab when you cannot quite meet the rent or need to buy a new computer. It means not only figuring out how to pay for your needs and wants, but budgeting your income so that you still have a little money left over.
“The single most important step any individual must take to become financially independent is to commit to living within his or her means,” says Vento. “In addition to living within your means, if you are ever going to get to Point X, you must also save money. Therefore, ‘living within your means’ includes not only such necessities as shelter, food, utilities, and clothing, but also payment into your personal savings. Ideally, that payment should be 10 percent or more of your gross pay.”
Understand taxes. The average American family pays more than one-third of its income in federal, state, and local income taxes—and even more in property taxes, excise taxes, sales taxes, and other hidden taxes, such taxes on cigarettes, liquor, and certain luxuries. In other words, for just about everyone, taxes are our biggest personal expense, by far.
“In order to reach Point X, it is imperative that you understand the basics of our tax system, and that you practice careful and strategic tax preparation and planning so your personal tax burden does not deplete your income unnecessarily, and your wealth accumulates quickly and safely,” explains Vento. “Tax laws are incredibly complicated, and there is no reason for you to read up on or understand the virtually infinite ins and outs of the often arcane U.S. Tax Code. Most people do need help from professional tax advisors to benefit from tax strategies; however, you should have enough basic knowledge about taxes and the tax system to ask the right questions and find the appropriate help to suit your own unique financial and tax needs.”
Determine your financial position. Determining your financial positiondoes not mean simply knowing your annual salary or identifying how much you take home in every paycheck—although that is definitely part of it.
“In order to live within your means, you must have a precise understanding of your financial assets, liabilities, and net worth, by preparing a Statement of Financial Position,” notes Vento. “You also need to know—and to track on a regular basis—where all your personal funds are coming from and going to: This is your Statement of Cash Flow. Finally, after taking a careful look at your current financial position, you must determine your financial goals, whether for five years, ten years, or throughout your retirement years. Only then can you realistically budget for the future—and of course, reach Point X.”
Manage debt. For many people, debt is a scary concept, although it need not be. The fact is there is good debt and there is bad debt. Understanding the difference between bad debt and good debt is imperative to becoming financially literate and financially independent. Basically, good debt is money that people borrow for purchases and situations that, in the long term, will help them amass wealth and ultimately reach Point X. Some examples of good debt include student loans, business loans, certain investment asset loans, and some personal-use asset loans (such as an affordable home mortgage). In contrast, bad debt is money that people borrow (usually on a credit card) for the purchase of nonessential expenditures as well as many personal-use assets.
“When you do not use debt properly, that can lead to significant financial hardship and can prevent you from ever becoming financially independent,” says Vento. “However, when you use debt to leverage yourself in the pursuit of accumulating wealth, it can be a very powerful tool.”
Insure your health and life. Even a sound, carefully planned investment strategy can fall apart if you have not prepared properly for unforeseen problems concerning health and life. If you or a member of your family is hit with a prolonged illness, a severe injury, a disability, or death (especially of the primary wage earner), the planning and investing you have so carefully developed can quickly disintegrate.
“Health insurance and life insurance help protect you and your family from the unexpected,” explains Vento. “The premiums you pay will provide you with the peace of mind that comes with knowing that your assets and family will be protected, if and when the unexpected happens. Having the right kinds of health and life insurance at the appropriate stages of life is as important as the insurance itself. Your particular situation will determine what type of insurance you need, what kind of policy or policies will work best for you, and the amount of coverage you should carry.”
Protect your property with insurance. Protecting your property by implementing the proper risk management strategies is critical to achieving and maintaining your financial independence. The type and extent of insurance you need will change throughout your lifetime, as will the types of assets and the extent of wealth you have accumulated.The three major personal property risk management issues include homeowner’s insurance, automobile insurance, and umbrella liability insurance.
“You should consult with your property liability insurance agent or broker to fully evaluate your needs so that you can determine proper coverage to meet those needs,” asserts Vento. “It is critically important to remember you should always secure your new insurance coverage before you drop your old policy. You never want to leave yourself unprotected without proper coverage in between policies. Obtaining the proper homeowner’s, auto, boat, and personal umbrella liability coverage can provide you with the peace of mind of knowing you and your property will be protected. Being unprepared for the unexpected can rob you and your family of your pursuit of financial independence.”
Pay for college. If you are like most parents, one of your biggest concerns is, How am I going to pay for my children’s education when the time comes to send them off to college? Some parents hope their child will receive academic or athletic scholarships or grants. But for most parents, the reality is they will have to pay the majority of the cost of college from their savings—or even worse, they may have to go into debt.
“With the skyrocketing cost of college, it’s important that you start planning early,” says Vento. “Be open to your children about financial decisions and what consequences these decisions will have on the family’s future. Take advantage of college savings programs such as Internal Revenue Code Section 529 plans, Coverdell Education Savings Accounts, savings bonds, financial aid (such as federal grants, loans, and scholarships), as well as education tax deductions and credits. Understanding how scholarships, government grants, and student loans can help is essential.”
Plan for retirement. Everyone should be planning financially for retirement, regardless of how old or young they are. Especially given that people coming into retirement are facing concerns that retirees did not face 20 or 30 years ago, including living longer and supporting themselves throughout turbulent financial times.
“The longer you wait to start saving for retirement, the harder it will be to accumulate the amount you need to be financially independent,” says Vento. “Remember, one of the most valuable investment assets you have is time; the more years you save the greater your chance of financial success. By far the easiest way to do this is by contributing to your employer’s retirement plan, or if that is not available, to an individual retirement account (IRA). Implement a retirement saving strategy that allocates a specific dollar amount or percentage—I recommend at least 10 percent—of your salary every pay period. Therefore, you are paying yourself first, as though saving for retirement is your number one required expense. In fact, saving for retirement is not an expense because it adds to your investable assets, but treating it as such is of utmost importance to your success.”
Manage your investments. The rewards of proper investing can be very generous when investors adopt an investment discipline that allows them to purchase quality investments and then allows those investments to take their course. This may have been best said by Warren Buffett, the primary shareholder, chairman, and CEO of Berkshire Hathaway who is also considered by many to be the most successful investor of the twentieth century.
“It is critically important that you select an investment model that you are willing to stay with, even in the worst of markets,” notes Vento. “The appropriate investment plan for you should be the one that provides you with the highest potential rate of return in the long run that is within your risk tolerance.”
Preserve your estate. If you do not take the necessary steps to preserve your estate, unintended beneficiaries may take a significant amount of your estate instead. These unintended beneficiaries include the federal and state governments, the state administrator, attorneys, and perhaps even relatives you have not spoken to in decades. The money you may spend today on a qualified estate attorney may save your estate significant dollars in both estate taxes and administrative costs down the road.
“Estate planning, which I should stress is not just for the wealthy, can give you peace of mind by assuring your family’s financial security will continue even after your death,” says Vento. “It can significantly reduce estate taxes, administrative costs, and assure that your loved ones will be taken care of. It allows you to dispose of your assets as you see fit, with consideration given to your heirs’ individual needs.”
“Financial independence—the point at which we can stop working for our money and our money starts working for us—or Point X, as I call it in my book, is the financial ideal that we all seek,” says Vento. “With the right plan and a commitment to making the necessary life changes, anyone can reach their Point X…but you have to be dedicated to making the lifestyle changes and taking the necessary steps to achieve financial security.”