CFP Board eNewsletter
June 2007
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CFP Board eNewsletter |
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| Getting Ready for Retirement II: Saving and Investing |
Remember that old admonition — you can’t burn the candle at both ends? Well, something like that has been happening to retirement. At one end, the length of retirement has been increasing, as average retirement ages and average life expectancies rise. At the other end, the amount of money people have during retirement compared to their pre-retirement earnings has been declining, as Social Security becomes less generous and 401(k) balances remain relatively modest. In other words, retirement funds are being consumed at both ends: the money has to last longer and longer even as it is becoming in shorter and shorter supply. What can you do to prevent your retirement plans from going up in smoke? Start saving and investing now. "If you’re not saving 10% of your gross income towards retirement, you’re not on the path to financial freedom," says Stewart H. Welch, III, CFP®, founder of The Welch Group and a member of CFP Board’s Board of Directors. Welch urges anyone serious about financial security in retirement, especially if the big day is less than a decade away, to do a retirement income analysis. "If you’re 10 years or less away from retirement, the clock is running out on your ability to have a big impact on your income," he says. "It’s critical to have an awareness of where you are now versus where you need to be." Many free online retirement planning tools can help you make that assessment. For example, Bloomberg.com’s Retirement Planner Calculator can provide you with a helpful financial snapshot. Based on an overview of your current financial situation, the worksheet provides a quick estimate of the money you will likely need in retirement. "An analysis will tell you if you come up short in terms of hitting the number you need for post-retirement income," Welch explains. "If you do come up short, then you have some decisions to make regarding how to get things in order." In the past, people got things in order by bolstering the three legs of their retirement stool: Social Security, employer pensions, and personal savings. Over the past few years, with potential changes to Social Security becoming a frequent topic of lawmakers and with companies shifting from defined benefit to defined contribution plans, that stool has started wobble. In his book What Color Is Your Parachute? For Retirement: Planning Now for the Life You Want, John E. Nelson proposes a more stable, five-legged model of retirement financing: Personal savings, Employer retirement plans, Real estate, Keep working, and Social Security (PERKS). These days, to make a success of retirement, you have to look after your PERKS. As Social Security and employer pensions get squeezed, personal savings are becoming an increasingly important part of the retirement equation. Welch suggests that individuals approaching retirement should work towards twin goals: Get completely out of debt, including paying off your mortgage, and maximize your savings for retirement. "It’s a whole lot easier to live, and a whole lot less stressful, when you’re out of debt," he says. "Focus on the worst debt first — the credit card at 21% interest rather than the mortgage at 6%. But don’t get out of debt at the expense of savings. Instead, find a way to do both. Often, it’s a question of making a few small sacrifices now or a lot of big ones later." The Choose to Save Web site, an initiative of the Employee Benefit Research Institute and the American Savings Education Council, features tips on saving, as well as Ballpark E$timate®, a streamlined way to estimate the cost of your retirement. Tackling debt not only relieves stress; it also frees up money to invest in your employer-sponsored defined contribution plan for retirement savings. These plans are like stalagmites, the beautiful rock formations found in caverns and grottoes. If you let savings drip into a plan long enough, a magnificent pile forms. Too often, though, not enough money funnels through, or we interrupt the flow by making untimely withdrawals. That’s why the best thing you can do is to maximize your contributions to your company retirement plan, and then put it on autopilot. Talk to your employer’s human resources department about having contributions automatically deducted from your pay, as well as about increasing the amount you contribute every year. This is especially important if your employer makes matching contributions to your 401(k); you only get the employer contribution when you make contributions of your own. Figure out what contribution level will generate the maximum match from your employer, and make the commitment to contribute at least that amount to your plan. As Welch says: "Don’t leave any matching money on the table." "Take Advantage of Retirement Savings Opportunities from Your Employer," available on the CFP Board Web site, has a checklist of things to do to make the most of your employer-sponsored defined contribution plan. For many people nearing or entering retirement, the most valuable asset they have is their home, which is why real estate has become such a key factor in retirement financing. What you do with your home depends, of course, on what kind of lifestyle you would like to have. "A lot of people consider their house their ace in the hole," says Welch. "Some choose to downsize by selling the house and moving into a smaller or newer one that costs less to maintain and repair. If you can reduce the costs of managing your home, the money saved can be used for other things." If your home is mortgage-free and you want to continue living in it, you might also consider a reverse mortgage, a loan based on the value of your property. You can find out more about this type of financing at ReverseMortgage.org. Whether you decide to relocate or stay put, you’ll want to make sure that you have easy access to healthcare — and that you are able to pay for it. For more information on health insurance, see "Help with Handling Health Insurance" elsewhere in this issue of It’s Your Turn. Why would anyone want to keep working after they reach retirement age? Two main reasons: because they want to, or because they have to. Along with increasing life spans have come increasing health spans, and many potential retirees opt to keep working simply for the personal satisfaction — even if they don’t need the money. "Personally, I think retirement is over-rated," says Welch. "There is nothing wrong with retiring from a particular career if you’re burned out from what you’ve been doing for the past 30 years. But there are tons of reasons — financial, emotional, and psychological — to continue to be productive in retirement." Plus, remaining in the workforce can have huge financial benefits, as well. Not only does it bring in extra income, Welch points out, it also gives you tax deductions you didn’t have before: "If you find something you like doing that puts you around other people and brings in extra money, then that’s a positive." If you do decide to keep working in retirement, you’ll want to take into account any impact that income will have on your Social Security benefits. Whether you work or not, however, Social Security is unlikely to replace as much pre-retirement income in the future as it has in the past. For comprehensive information on what to expect from Social Security, visit the official Web site of the Social Security Administration. And for tips on how to perk up all your retirement PERKS, check out "Plan Now for a Comfortable Retirement" on the CFP Board Web site. This is the second in a four-part series of articles on retirement. Next month: Generation-X and retirement.
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| Survey: Have You Adequately Planned for Retirement? |
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Four years ago, CFP Board asked its Web site visitors if they felt adequately prepared for their retirement years. While a quarter of those who completed the survey felt confident they would retire comfortably and on time, 19% were confident they would need to postpone their retirement plans. Half of the survey takers were hesitant to make a firm evaluation of their retirement plans. Have times changed? Let us know how confident you are about your retirement planning.
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| Brave New Workplaces: Financial Planning as an Employee Benefit |
Gone are the days when Americans expected to spend their entire career working for one employer who would provide them a generous pension plan and insurance coverage for little or no cost. Things are a bit more complicated now. Last summer, the U.S. Department of Labor reported that workers between the ages of 18 and 38 are likely to change jobs (through change of employers or change of occupation at the same employer) an average of 10 times during their working lives. And while learning a new job can be a challenge in itself, each new job can bring with it a host of not-so-familiar terms — perhaps GULP STD and LTD, 125, HIPAA-protected, FICA tax-saving HDHP — HSA HRA (HMO, PPO or POS?), MERP, cliff-vested DBP or SAR for ERISA-protected 401(k), 403(b) or ESOP. Today’s employee benefits can provide individuals with a range of choice, but that means employees must make decisions and take action. Employees must make significant decisions about retirement planning, health, life and disability insurance, tax management and other issues that affect their finances — and many are required to make these decisions quickly during short open enrollment periods. Americans today are often required to make a broader range of financial decisions than those their parents made, and for most Americans, the workplace is where most important financial decisions will be made. More and more companies are realizing their employees could use a hand in making the best decisions about the financial benefits they receive through the workplace. IBM employees learned this spring that they would have access to free, comprehensive financial advice, including online tools, educational seminars, one-on-one telephone and in-person financial planning sessions. Other employers take the financial planning needs of their employees so seriously that they hire financial planners as full-time employees to serve as a resource for other employees. Employees are encouraged to meet individually with the on-staff financial planner for any financial planning-related assistance they might need. The Houston Police Officers Pension System, for example, has hired as a full-time employee a local CFP® professional to provide Houston police officers free financial planning advice on an as-needed basis. The CFP® professional cannot sell or recommend any specific products or make referrals to other financial planners, but the on-staff planner can act as a middleman between the police officers and the financial marketplace. Some companies have set up benefits that don’t provide employees with direct financial planning services but that nonetheless provide them real encouragement to seek out financial planning assistance from qualified financial professionals. These companies offer financial planning subsidy programs that employees can use to receive reimbursement for authorized financial planning expenses. Denver Water Board, for example, offers its employees an option to discuss their retirement plan disbursement options with a financial planner within six months of their anticipated retirement dates. The company has contracted with a group of financial planners who have agreed to provide services within a certain fee structure, and employees who choose to receive additional services are responsible for paying any additional fees incurred beyond the eight hours subsidized by Denver Water Board. Other companies may offer less comprehensive financial planning assistance that nevertheless provides valuable assistance for complicated financial decisions. The international consulting group ORC Macro realized that the decisions its employees had to make about the Health Savings Account (HSA) benefit were sometimes quite complicated. To help their employees make the best decisions, they made arrangements with Myfinancialadvice, Inc (MFA) to offer their employees an online service platform that connects employees with the CFP® practitioners of MFA’s network directly through the company’s human resource intranet. Employees receive live, individual advice about their HSA benefit — delivered by phone and e-mail through a secure Web site — from the financial advisor they interviewe and choose. At the close of each advice session, the employee receives a highly personalized written advice summary, including the advisor’s analysis and recommendations. ORC Macro employees who took advantage of MFA’s HSA service rated their advisors across a number of service dimensions including professionalism, objectivity and quality of advice. On a scale of 1 to 10 (10 being highest), the composite customer rating of advisors was an astounding 9.87. Rhonda Goldstein, Benefits Manager for ORC Macro, saw great benefit from the HSA service’s focus on advice rather than investment products, observing that the employees “liked that they could feel like no one was trying to sell them something.” The efforts these companies have made to provide their employees with access to financial planning services are notable partly because they’re at the forefront of a growing movement. A recent report issued by Spectrum Group, called “Financial Planning at the Workplace,” found that about 60 percent of the 339 participants in defined contribution plans (401(k), 403(b), 457, and TSP plans) surveyed said financial planning services aren’t yet available to them through retirement plans. It’s currently more common for companies to provide employees with educational materials or workshops about financial issues. Many financial service firms that provide retirement plan administration services to companies also offer educational sessions to those companies’ employees. While the information received at those sessions may not have the same value of personalized, one-on-one financial advice, it can help employees learn more about the options available through their retirement plans and other employee benefits, and it may also provide enough information to help encourage employees to find qualified professional financial planning assistance. Approximately 60 percent of employees who participate in educational seminars presented by the Heartland Institute for Financial Education go on to seek financial planning assistance from the financial planner who instructed the seminar, many of whom are CFP® professionals. Why would an employer offer access to financial planning services through the workplace? While there may be a few employers who offer generous employee benefits out of the goodness of their hearts, the answer usually comes down to a pretty simple business decision. Financially-stressed employees are less productive, which negatively affects the bottom line. Employers can also gain significant financial advantage when employees participate in certain benefit plans. For example, employees who are offered tax-advantaged retirement or healthcare plans such as a 401(k) plan or Health Savings Account, but who are confused as to how they work or how to allocate money, tend to adopt such plans at a very low rate when they do not have access to financial guidance. When employees do adopt these plans, the increase in employee contributions to a company’s 401(k) plan means a bigger tax break for the employer. Likewise, the larger the plan and number of participants, the greater the employer’s negotiation power with plan fees. There is a tremendous incentive, therefore, for employers to sponsor and pay for targeted advice on complex healthcare, retirement plans and other financial products and accounts. Pressure to introduce financial planning benefits to the workplace may also be growing from the inside. Some 85 percent of respondents in the Spectrum Group study said they would use general retirement planning services if available, and 81 percent of those with no access to financial planning through their retirement plans said they would be interested in investment planning and review if it was offered. If your company does not currently offer some type of workplace financial planning benefit, speak up and share your interest with your human resource department. Your human resource personnel may not be familiar with the idea of financial planning workplace benefits, or they may believe the cost of the benefit would be too high. Be prepared to direct them to the Workplace Education Program section of CFP Board’s Web site, where they can review and download free educational resources to help human resource professionals and employees learn about the benefits of financial planning. From posters and flyers offering information about the importance and benefits of financial planning, to presentation materials, newsletter articles and Financial Planning Resource Kits, these materials remind employees of the need to plan their own futures, regardless of the benefits offered by their employers. Also, be on the look out in coming months for updates to materials and resources and examples of different financial planning employee benefit models used by different companies from all over the U.S.
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| Help with Handling Health Insurance |
Planning for retirement is one of the biggest financial challenges many people will face. But even the most carefully laid plans can unravel if health insurance is not factored into the equation. Both the need for healthcare and its cost increase with age, and those expenses can blow an enormous hole in an otherwise solid financial plan for retirement. Health insurance is a complex subject and, according to the U.S. Census Bureau, upwards of 45 million Americans do not have it. Here are some tips on the kinds of health insurance available, and resources for finding further information. The Healthfinder.gov Web site is a good place to start looking for government and non-profit healthcare services. The site, developed by the U.S. Department of Health and Human Services, has links to more than 1,500 health-related organizations. It also offers hospital and nursing home ratings, health insurance guides, and background information on healthcare providers. The Consumer Guides section of the Web site has resources on everything from medical privacy to prescriptions. For information on health insurance protections and provisions in the state where you live, check out A Consumer Guide to Getting and Keeping Health Insurance, compiled for each of the 50 states and the District of Columbia by the Georgetown University Health Policy Institute. Medicare and Medicaid are the Federal government's health insurance programs. Medicare is designed for people aged 65 and over, and Medicaid is intended for people who are not able to cover their medical costs themselves. Both programs have complex eligibility rules and co-payment requirements, and it is quite possible that neither one will cover all of a person’s medical needs. For Medicaid, eligibility and coverage vary by state. For information on Medicaid where you live, contact your State Medical Assistance office, which can be located via the Helpful Contacts page on the U.S. Department of Health and Human Services Web site. You can learn more about what Medicare does and does not cover by downloading or ordering the Medicare & You 2007 handbook from the Medicare Web site. Private health insurance can be just as complicated as Medicare and Medicaid. If you are covered by a health plan through your employer, your human resources or employee benefits department will be able to provide details of the plan. Choosing and Using a Health Plan, a guide produced by the Agency for Healthcare Research and Quality, also provides comprehensive information on the changing shape of healthcare in America. The Web site provides clear and concise descriptions of the different types of health plans (fee-for-service versus managed care) as well as useful tips on issues such as comparing plans and selecting a physician. In addition, the Guide to Health Insurance, from the health insurers group America’s Health Insurance Plans, features detailed explanations of the wide variety of available health coverage, from long-term care insurance to disability income insurance. For more information on long-term care insurance, see "Try a Little LTC: A Guide to Long-Term Care Insurance," from the April 2007 issue of CFP Board’s It’s Your Turn newsletter. So, now you know everything there is to know about health insurance, but one question remains: How do you pay for it? Health Savings Accounts (HSAs) are one option that might be attractive. HSAs are personal savings accounts that can be used to help pay for medical expenses not covered by your insurance policy. Like a 401(k), both you and your employer may contribute funds to an HSA. And, as long as those funds are used to cover qualified healthcare costs, all the money accrues tax-free. The Consumer Guide To Health Savings Accounts, from the National Association of Health Underwriters, contains full details on how HSAs work and what you need to do to open an account. As even this brief overview demonstrates, health insurance is a complicated subject. That’s why you should always consult a qualified professional before making any decisions. And it’s not a bad idea to review your healthcare provisions annually, since the healthcare needs of you and your family will change as you get older.
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| Financial Alerts |
The North American Securities Administrators Association compiled its annual list of the top 10 fraudulent activities likely to trap investors. From affinity and internet fraud to foreign exchange trading, prime bank schemes, investment seminars and the sale of unlicensed securities products by unlicensed individuals, learn what to be aware of and how to protect yourself against unscrupulous people out to get you, your money and your identity. Educate yourself at: Those shopping for mortgages will want to review the recently-updated Consumer Handbook on Adjustable-Rate Mortgages published by the Federal Reserve Board. This update provides information about these loans with changing interest rates (also referred to as "ARMs") and cautions ARM borrowers about the payment shock that can occur when sudden interest rate changes raise a required monthly mortgage payment, sometimes beyond the borrower’s ability to pay. The Federal Reserve Board also advises caution with ARMs that may lead to negative amortization — a situation where you owe more than the amount originally borrowed — which can make it difficult to refinance or sell a home. View the updated handbook at: The National Association of Insurance Commissioners reminds recent college graduates that finding a new health insurance plan once health coverage expires under a parent’s policy should be on the top of their post-graduation to-do lists. As tempting as it may seem to forfeit health insurance to save money, the financial repercussions of experiencing an unforeseen illness or accident while uninsured can be far more devastating than shelling out money to pay back student loans and credit card debt. Learn about the importance of having an insurance plan suited to your health needs, the different types of health plans available, and information about health-related services that are not health insurance plans at:
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