Client L, Parts 3 & 4: From Budget to Need for Risk

I’ve had four meetings with a friend to help him organize and plan his financial future (posts about the first two meetings are listed under the Client L tag). Since I last wrote we’ve met twice. In that time L has completed a household budget. It revealed that his family has excess income that is not required to meet current consumption, even after accounting for current 401(k) savings. Therefore, L and his family can afford to put some more money away (in Roth IRAs, in 529 plans, and the like) for the future.

Using his current household budget, L and I worked out his retirement budget (see Estimating A Retirement Budget) and, with that, his need for income in retirement (see Need For Risk: The Details). The next step is to use the Ballpark Estimate calculator (or other retirement calculator) to determine what average rate of return he requires to achieve a level of savings that will support the retirement income he’ll need.

One can do more work to refine and tailor one’s risk/return trajectory over time (and I’ll describe how to do that in my investment planning series), but just doing the above is enough to get a rough sense of how to invest one’s funds. With this as guidance, we will begin to look at the options available at Fidelity and in L’s 401(k) plan. Likely soon he’ll be ready to select an asset allocation and specific funds.

Also, over the next week or so L will figure out whether he and his wife are eligible for establishing Roth IRAs. It is possible one or both of them may have to take advantage of the elimination of the AGI limits on Roth conversions in 2010.

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