Chapter 1
THE FINANCIAL PLAN

The first step in successful investing is to choose a plan. You may design it yourself or pick an advisor or product that uses a particular approach. Financial plans generally fall into three categories:

1. Target plans
2. Annuity plans
3. Endowment plans

Combinations of the three plans are also common.

1. Target plans place all your goals into different buckets with different strategies for each bucket. Sometimes target plans go so far as suggesting a different account for each bucket. Different buckets might be for emergencies, tuitions and retirements. This elegant approach provides a form of insurance that all goals are met. The problem is that the shorter-term goals require less profitable short-term investments. Target plans are therefore harder to fund and also subject to greater risks of unexpected events.
2. Annuity plans generally do not include annuities. We call them annuity plans because they are an attempt to design a plan that provides income for the life of the individual without any major amount left for an inheritance. I say attempt because these plans are tested, and the passing grade is a 95% chance of the funds lasting a lifetime. Beside this 5% possibility of failure there is also the issue that life expectancy is growing creating additional funding shortage issues. This concept of using up all your assets for your enjoyment before your demise is supported by some economists. They believe that money left on the table is wasted.
3. Endowment plans for individuals are similar to university endowment plans. These plans are designed to grow during the entire lifetime of the individual. Growth would continue even when funds are being withdrawn to support a retirement. Some individuals look around and see that everything is in order and their estate is not needed so why not spend it all. Others feel that the estate is for the family or charity, so an endowment is the way to go. We would suggest an additional view.
   A. Endowment plans invest long term and can use higher return long term investments approaches. The Endowment plan withdrawal rate from income in retirement may be higher than the other plans can provide even when they pay out income and principal.
   B. The Endowment plan growth provides a cushion for unexpected individual or family surprises. Twins, running for public office, starting a major charitable foundation, bailing out a son from a Turkish jail, or another family responding to a son’s hitchhiking a ride across the country and being stopped by police who arrested the driver, for murder, are some of the unexpected client calls we received.

   C. Endowment thinking also helps in the most important activity a client can add to portfolio success, being patient and not selling their quality securities during market downturns.

Katz Family Financial