Life Planning 2012

lifeplanning planning GUIDE 2012

Countdown to Retirement: Smart Ways to Plan in Your 20s, 30s, 40s and 50s

What Next? Rethinking How We Save

On the Way to a Financial Plan

5 Tips for Cutting Debt

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Why your family needs a financial plan

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LIFE PLANNING GUIDE | Sunday, March 25, 2012 | Palladium-Item Media Group

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Palladium-Item Media Group | Sunday, March 25, 2012 | LIFE PLANNING GUIDE

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saving and investing: What next?

Tough economic times pushed many families to the brink and left others with a fearful question: Have the old rules of saving and investing changed forever? | by dawn klingensmith Feeling distrustful of the stock market and insecure about your finances and investments? Financial adviser David Gottlieb sits down with people like you almost every day. Into his Pepper Pike, Ohio, office he welcomes an allAmerican parade of average savers and investors – newlyweds, single moms, families with kids to put through college, couples about to retire – most with a single uneasy question: Has the mortgage industry meltdown, the housing collapse and the rickety economy changed the rules of personal finances and investing? His short answer: No. Gottlieb does suggest that his clients make one radical change:Tune out the headlines.

“I hear the same rant all the time about the president, the economy, the global economy, Greece. People are making decisions based on headlines and emotions,” which costs them in the end, says Gottlieb, a financial adviser for Edward Jones.

Investors were clobbered with massive investment declines in 2008; however, the recession officially ended more than two years ago.Those who stayed the course have done well since 2009, compared with those who yanked money out of the stock market in a panic.

“If anything, the economic climate reinforces basic financial principles,” says Ruth Ann Potts, manager of advanced planning at Country Financial in Bloomington, Ill. The aftermath of the great recession is a good time to review those basics and consider some new approaches, based not on doomsday newscasts but on your individual circumstances and goals.What have we learned since the great fall? A lot. takE a dEEp brEath and stay thE coursE

The market crisis of 2008 proved that diversification offers no guarantee against losses; however, it tends to reduce the damage. Maintain a diversified, balanced portfolio, Potts advises, and don’t let a market slump change your long-term investment plan. Historically, the market consistently and reliably recovers.A down market may even present an opportunity to add holdings and accelerate your recovery.

But keep in mind that stocks are risky by definition; that’s why they have high expected returns. Just because the market historically recovers does not 4

LIFE PLANNING GUIDE | Sunday, March 25, 2012 | Palladium-Item Media Group

401(k) account.“Focus on where you put new contributions,” she says.

Funnel new contributions and investments “into vehicles you’re more comfortable with.” considEr safEr invEstmEnts

mean that your risk vanishes in the long run, no matter how long you hold onto a stock, warns Zvi Bodie, coauthor of “Risk Less and Prosper:Your Guide to Safer Investing” (Wiley, 2011).

EmbracE your risk tolErancE

In the wake of the market crisis,“A lot of people realized they don’t have as much tolerance for risk as they thought and are making adjustments,” Potts says.Assessing risk tolerance used to be hypothetical: How will you sleep if your investments drop in value by 10 percent or 50 percent?

Now, it’s real and observable:When the markets crashed, did you buy, hold or sell your stocks?

Because you lock in losses if you unload stocks during a market slump, Potts recommends that risk-averse individuals not make adjustments to investments already tied up in a

Bodie believes that the riskiness of stocks is understated and that many investors have too much allocated to stocks and not enough allocated to safer, inflation-indexed investments.

Risk-averse investors in particular should see how far a low-risk investment strategy will take them, and then make adjustments to meet savings and retirement goals.“For safety and protection against inflation,Treasury Inflation-Protected Securities and U.S. savings bonds called I Savings Bonds are unsurpassed,” says Bodie, a professor of management at Boston University.“Initial investment is guaranteed, and return is paid in inflationadjusted dollars.” don’t ovErcorrEct or undEr prEparE

Economic collapse made a big impression on young investors.“This painful economic environment has affected the risk appetite of the 20- and

learn more about…

Financial planning at every stage of life at mymoney.gov Buying U.S. treasury securities online at treasurydirect.gov Using credit wisely at federalreserve.gov/consumerinfo/default.htm © ctW features

30-something set.At a stage in life where they can most afford to take on additional risk with their retirement savings, huge numbers of young folks are not,” says former portfolio manager and financial literacy advocate Manisha Thakor, of Santa Fe, N.M.“The problem with this is that it sets them on a path to be under-saved for retirement when they hit their 50s and 60s, and thus they may end up taking on too much risk when they can least afford to, where there are fewer years on their side.” don’t bE rEtirEmEnt-rich and cash-poor

“People are putting money in 401(k)s but not in the bank,” Gottlieb says, adding that investors have somehow gotten the impression they need to retire with a million dollars.

Consumers also have been advised that anytime they come by extra cash, such as a bonus, they should use it all to pay down credit card debt. Gottlieb says to use some or most of it to chip away at your balance, but to keep the rest “just for the sake of having cash again and paying for things in cash instead of feeling broke all the time and charging things.”

Beef up your emergency funds, too.

Having the equivalent of three to six months’ salary or living expenses set aside is still the recommended minimum, Potts says, but high unemployment rates and the struggling economy suggest six to 12 months’ worth might be more prudent.

In addition to an emergency reserve fund, have a “put-and-take” savings account for unexpected day-today expenses like home appliance repairs or occasional splurges, Potts

recommends.

If you are saving for a particular item or event, consider opening a separate “earmarked and untouchable” account just for that:“You almost need to open up different accounts for different savings goals so you won’t touch it.When you put everything in a general account, it gets spent,” says Gottlieb, who has an account designated for his daughter’s bat mitzvah.“I understand people will fight me on this and say [the money] is not making interest. But cash gives you the ability to buy things, not borrow things.

“The rate of return is not the issue," he says. "It’s having money on hand when you need it.” trEat Education as an invEstmEnt

Student-loan debt now eclipses credit card debt.“As the price of education has risen and wages have stagnated, it’s no longer a no-brainer that any educational debt is good debt,”Thakor says.“In the current environment, it is essential to step back and think strategically about how much you are paying for an education relative to the earnings you expect as a result.When the return on investment isn’t as high as you’d like, it’s time to think creatively.That may mean living at home while going to school or taking a year or two off before even starting school to live at home, work and save. Or, start at a community college and then transfer to a state school.

“The point is to view education as any other valuable asset and make sure the return justifies the up-front investment.” © ctW features

Palladium-Item Media Group | Sunday, March 25, 2012 | LIFE PLANNING GUIDE

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Saving for retirement: The Timeline How to think smarter and plan better for retirement at every stage of life | by Taniesha robinson Funding retirement is easy. Just ask planner David Schaeffer.“Make all you possibly can. Save all you possibly can.”And, start early. Often, the people asking him for help on the eve of retirement didn’t screw up their investments.“It’s not that they did something wrong. It’s that they never did something,” says the Schaeffer, , a retirement planner with Futurity First Insurance Group in Phoenix.There’s something for folks at every age to learn about saving and investing for retirement. Start here.

In your 20s

Saving for retirement savings isn’t a hot topic among 20-somethings. But young people develop financial habits and make life decisions that can have lifelong consequences.

“The kind of job you get when you’re young, in your 20s, can have a big impact on your lifetime security,” says Anna Rappaport, a consultant for the Women’s Institute for a Secure Retirement,Washington D.C.“A teacher or a policeman gets into a public pension plan.That’s a lot different from getting into an occupation where there’s likely to not be much benefit.”

Today, expected retirement income from pensions or 401(k) accounts must be coupled with disciplined lifelong personal savings, says Bonnie Sewell, principal financial planner at American Capital Planning,Washington, D.C. “This is the easiest time in your life to save if you don’t buy into an expensive lifestyle,” Sewell says.“Regardless of your age, Tip your focus should be on disciplined saving and less on investments.”

Start early. A It can be difficult for someone who just entered the 25-year-old who saves 15 percent labor force to think about saving for retirement. “If it feels a year is likely to better to call it ‘choices savings’ rather than retirement, do be able to afford that,” Sewell says. Early savings allows more “choices” later to retire at 62. “If on: career changes, marriage, divorce, health issues and you start later, more. you need to save more,” Rappaport The Schaumburg, Ill.-based Actuarial Foundation recsays. ommends people who begin saving in their 20s to put away about 10 percent of their income, a common rule 6

LIFE PLANNING GUIDE | Sunday, March 25, 2012 | Palladium-Item Media Group

backed by other financial advisers. If they are able, Sewell and Schaeffer recommend those in their 20s save up to 20 percent of income, which they say is ideal.

In your 30s

This is the time to eliminate debt and be smart about a home purchase.

“Hopefully, college debt is behind them and the only loans in place are well-managed, auto- and housing-related loans,” says Schaeffer. If your employer does not match a portion of your contributions to a company 401(k) plan, Schaeffer says, it could be worth seeking out one who does.

Job changes and even career changes are common at this stage.“If you enter a defined contribution plan and if you have good savings levels at

every job, career changes are fine,” Rappaport says.

This may be the time a young couple welcomes their first child.When women take a break from work for childbirth and child-rearing they lose immediate income and also lower their lifetime earnings, reducing retirement benefits. Sewell says the wife should propose that half her husband’s savings during that time fund the retirement accounts.

Continue to save in a disciplined fashion, even if investments are growing steadily. Back in the day, an Tip investor could simply pick a Because women tend to live longer, sound allocation they need to save of funds within a more 401(k) and aggressively. “everything would be fine,” Schaeffer says.This is no longer true.

Individuals who begin their retirement savings in their 30s should save around 13 percent of their income, according to The Actuarial Foundation.

In your 40s

“You should be approaching peak earning years," Schaeffer says.“College may be competing with retirement for your savings dollars. If your lifestyle will allow, save aggressively.”

Home and auto loans, bills and retirement savings alone can cause financial strain during this life stage.

But the addition of college tuition payments can make it unbearable, even for families that have made all the right financial steps thus far.

According to a 2008 study from

the National Center on Higher Education and To determine Public Policy, colwhether you’re on lege costs are track in your savings try the AOL’s roughly a third of "Am I Saving the median famiEnough? What ly income for Can I Change?" lower-middlecalculator at class Americans. calculators.aol. com/tools/aol/ The Actuarial retire02a/tool.fcs Foundation advises parents to ask children to help pay for their education with earnings from summer and part-time jobs, scholarships and loans.

“If you make bad decisions on cars and mortgages and college, you’ve shot yourself in the foot,” says financial planner Sewell.

The Actuarial Foundation recommends those who begin saving in their 40s to put away 20 percent of income.

Tip

In your 50s

It’s time to sock away every nickel.

Ideally, for savers of this age, mortgage costs should be in the range of 10 percent of income, Tip Schaeffer says, and auto costs Learn what your should be low. estimated social security benefit “College costs will be at retireare behind you ment by using the and you are in retirement estimathe 20-year home tor at stretch to retirewww.ssa.gov/ estimator or call ment,” he says.

800.772.1213.

Make “catchup” contributions

to retirement savings now, if necessary. Resist any permanent withdrawal of retirement funds, especially before age 59.5, when early-withdrawal penalties disappear. Most account withdrawals will be taxed.

Individuals who’ve just begun their retirement savings during this life stage need to save around 40 percent of their income, according to the Actuarial Foundation.

AT Age 65

Full Social Security benefits kick in at this time, but it’s not going to be the reward that past generations saw. If retirement savings have been lackluster over the years, there are some rescue options.“There’s no reason that people who haven’t saved enough are doomed to a spartan existence, unless they insist on living in a high-class area or continue to spend at a level that is unsustainable,” Sewell says.

Tip She suggests taking on an Sell assets that are not producing extra job – partmuch income or time may be growth, such as enough – and undeveloped land perhaps creating or a vacation a stream of home, and invest in income-producincome on the ing assets. side from selling something you make or providing a service, from building websites to de-cluttering homes.

Retirees can expect to spend 4 percent of retirement assets annually to stretch savings over their remaining years, Schaeffer says. More than that is a problem. © CTW Features

Palladium-Item Media Group | Sunday, March 25, 2012 | LIFE PLANNING GUIDE

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5 Tips for cutting debt

Brown-bagging will get you only so far. Putting household finances on a firmer footing calls for deeper changes and fresh thinking | by Marilyn kennedy Melia Thirteen-point-eight trillion dollars is a mighty big sum.Yet, for years, we hardly noticed it. Now it’s commanding our attention.

From 2000 to 2008,Americans doubled the amount of mortgage and consumer debt they held, until it came to $13.8 trillion, according to the U.S. Federal Reserve.You know the rest of the story:The financial world collapsed and frightened consumers got out their calculators to total up their tabs. From the $13.8 trillion peak, households have reduced that debt by half a trillion dollars and counting.

There’s still a long way to go, economists believe, before Americans achieve healthy balance sheets. Consumers have “learned the hard way that being approved for a loan and being able to afford that loan are two very different things,” says Kim McGrigg, community relations manager for nonprofit counseling agency Money Management International, based in Sugar Land,Texas.

Even when the economy is back on track, households should abandon the “everyone is doing it, so it must be OK” spending mentality, McGrigg says.

Instead, families and individuals should focus on their own personal financial security. Does a pile of bills stand between you and financial peace? Here are some new ways to approach making a dent in debt: Track whaT you spend

You’ve probably heard the conventional wisdom: Just give up your morning latte and you’ll find financial security.

It’s more complicated than that, of course, but insignificant purchases can gobble big sums. Michael Collins, director of the Center for Financial Security at the University of Wisconsin, suggests keeping a list of everything you spend for at least a few weeks. By tracking every purchase, you discover what discretionary purchases can go; devote that sum to debt reduction.

Make a budgeT

Even for those who are discouraged by debt, the word “budget” can spark even more disheartening visions of 8

denial.

But budgets have the big benefit of ensuring that necessities are paid.

Moreover, there are ways to budget to allow a "yes" to some purchases, says Stuart Vyse, a psychology professor at Connecticut College in New London, Conn., and author of “Going Broke:Why Americans Can’t Hold On To Their Money” (Oxford University Press, 2008).

Vyse keeps two checking accounts. One is dedicated to necessary expenses; a monthly automatic deposit guarantees that money is there to pay the essentials.

Experts advise choosing any system that allows you to separate money for necessities. Of course, it’s important to pay more than mini-

LIFE PLANNING GUIDE | Sunday, March 25, 2012 | Palladium-Item Media Group

mums due on credit card debt.

Additionally, Ithaca College (Ithaca, N.Y.) consumer psychology expert Michael McCall recommends that you designate some cash for splurges.

Paying for the fun stuff in cash is important, he says, since studies show that we’re more reluctant to spend when we must fork over actual dollars. seT goals and work Toward TheM

Once you’re on a budget, you’re likely to replace the pleasure that once came with spending with the gratification of seeing debt disappear.

“Specific short-term goals help keep people motivated,” Collins says.

While it may be tempting to pay off debt with the smallest balance first – rewarding, because you see “progress” quickly – focus instead on paying off debt that carries the biggest APR.You’ll save more money in the long term by working down larger, higher-interest debts first. don’T grow old wiTh debT

Unfortunately, there is no standard

guideline on how much mortgage or credit card debt is dangerous, Collins says. But it's not smart to continue to rack up high-interest debt now, intending to pay it off sometime down the road. Older people who carry debt face a daunting challenge simply because they have a shorter time horizon to clear the slate before they retire.

“Your income is going to shrink [in retirement], and if you’re still carrying credit card debt, then you could actually have negative cash flow each month,” warns John Ulzheimer of SmartCredit.com.

While they may plan to extend work, debt-burdened pre-retirees usually must cut spending to the bone.

“Educate yourself,” suggests Barbara Whitehead, co-author of “For A New Thrift: Confronting The Debt Culture” (Broadway Publications, 2008).

Research ways to work down debt and learn how to allocate dollars between savings and debt reduction, she says. becoMe a relucTanT spender

How much of your debt is due to spending on things you thought you must have and now hardly care about?

Instant gratification is responsible for a lot of the debt burden,Vyse says. Moreover, we’re subject to constant temptations.“The world has changed dramatically,“ he says.“In the 1970s, when we went home at night we were out of the marketplace. Now you can go online or shop anytime.”

Before handing off your credit card, ask:“What harm would there be if I don’t buy this right now?”Wait a day and it’s likely you will have forgotten the item that would only add to your debt woes,Vyse says. © cTw Features