CFP Board eNewsletter
October 2008
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CFP Board eNewsletter |
| When the Going Gets Tough, Stick to the Plan |
“Don’t panic.” How many times have you heard those two words—from politicians, economists, CEOs—since the current financial crisis began? It is excellent advice, but it can be hard to follow, especially when everyone else around you seems to be doing exactly that: panicking. But if there ever was a time to stay calm, cool, and collected—and to stick to a financial plan—that time is now. After all, says Michael Kitces, CFP®, director of financial planning for Pinnacle Advisory Group in Columbia, Md., “This is why we plan in the first place.” So here are some tips for sticking with your financial plan during challenging times. The dramatic events of the past few weeks have prompted many people to take equally dramatic steps: to get out of the stock market altogether, for example, or to drastically alter their savings and investing plans. According to a survey carried out by AARP, an advocacy group for people aged 50 and over, as of September, some 20 percent of middle-aged workers stopped contributing to their retirement plans during 2008. Previous surveys have already shown that many people aren’t putting enough into their 401(k)s or IRAs to see them through retirement. Stopping or cutting back contributions will only make that shortfall worse. The AARP survey also found that 13 percent of respondents had prematurely withdrawn funds from retirement investments, even though doing so incurs a tax penalty. What may seem like a smart decision in the short term could end up having unexpected—and unpleasant—long-term consequences. That’s why Kitces advises anyone considering a major change to look before they leap. The first thing to do, Kitces says, is to review your overall plan: “This is a perfect time to get a handle on questions like, What are my goals? Do I have enough leeway to absorb these losses? If not, do I need to change my goals?” If, say, the purpose of your investment is retirement, then look at the current situation in the context of that goal. “If you’re 15 years from retirement, you may still be on track,” Kitces say. “The run up to this crash has been great, so maybe during that period you accumulated enough [for your retirement]. If not, then the options are to earn more, save more, spend less, or retire later. Ask yourself, How much are the losses relative to my goals? Do I need to play defense, or can I stay invested and wait for the recovery?” That recovery will surely come, says Michael Rubin, CFP®, founder of the Portsmouth, New Hampshire-based financial education firm Total Candor. “It’s important to understand that this is part of the investing cycle,” Rubin says. “It hasn’t happened in 80 years, but it’s always been within the realm of possibility.” Rubin cautions against drawing the wrong conclusions from this crisis: “It’s easy for people to say, ‘It’s okay not to save aggressively because if I put money in my 401(k) it would just go down anyway.’ That’s a huge mistake. The opposite is true. If you’re sitting on heavy losses, the amount you need to save has actually gone up. When interest rates are down and stocks are down, savings are even more important.” Another form of savings that takes on enhanced importance during a downturn is an emergency fund. Unfortunately, during troubled economic times, the chances of having an emergency go up. Having a fund on hand to deal with unexpected expenses provides peace of mind and can help keep your overall financial plan on track. For more information on how to start an emergency fund, see In Case of Emergency … Use This Fund! in the September 2007 issue of It’s Your Turn. There are other ways to bring more stability to unstable times. Make sure you keep your spending under control by creating—and sticking to—a budget. For tips on how to trim costs and prepare a budget, see Preparing Your Financial Fire Drill in the April 2007 issue of It’s Your Turn. This might also be a good opportunity to review your credit score. Lenders are likely to use stricter criteria in determining loans, so a healthy credit rating is crucial to getting the best terms. For more information on your credit score and how to improve it, see How to Keep Score of Your Credit in the September 2008 issue of It’s Your Turn. According to Jenna Mitchell Everett, CFP®, an advisor with Everett & Associates in St. Joseph, MI, and author of 50 & Forward: A Journey of Financial Awareness and Self Discovery, part of the anxiety people feel has to do with the fact that, apart from the bursting of the tech bubble, a lot of baby boomers have only seen great economic times. “We’re used to spend, spend, spend,” Everett says. “Now we watch the market every day and wonder when it is going to hit bottom. No one on the planet is an expert on this. We need to lower our expectations and remember that things will come back over time. For people aged 50 and under, who still have 20, 30 or even 40 years to invest, now is a great time to buy a lot of stuff really cheap.” Another thing to remember, says Kitces, is “You don’t have to do this alone. Get a planner, someone whose expertise can guide you down the track and help keep things in perspective.” A survey of conducted this month by CFP Board found that 78 percent of the clients of CERTIFIED FINANCIAL PLANNER™ professionals are standing firm with their existing financial planning strategies in face of the current market turbulence. Similarly, a recent survey by the Financial Planning Association and advisory firm Ameriprise Financial found that nine out of 10 consumers with a financial plan felt they had a clear financial direction. “In contrast to the many Americans who have reacted to recent market fluctuations with fear and sometimes drastic changes in their financial strategies, individuals who are working with CFP® professionals are responding to the same situation with confident and measured approaches,” said CFP Board CEO, Kevin R. Keller. If you want some professional advice to help you make informed decisions amid today’s economic uncertainties, you can locate CFP® professionals in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on the CFP Board’s Web site. And one more thing to remember: Don’t panic.
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Market Volatility Causing Many to Rethink Retirement Schedules |
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Current economic conditions are prompting many 40-plus workers to reconsider their retirement plans, two recent surveys show. A survey of more than 450 people aged 45 and older who are members of Eons.com, an online social network aimed at the 40-plus crowd, found that 55 percent fully expected the events of recent weeks to cause them to postpone their retirement plans for at least five years. The survey, conducted between Sept. 26 and Oct. 2, also found that 46 percent of respondents had experienced losses of 10 percent to 20 percent in their retirement portfolios year-to-date. Meanwhile, a separate survey of 1,628 workers by Washington-based AARP found that 65 percent of respondents 45 and older were considering delaying retirement if the economy didn't improve soon. The AARP report, titled "Retirement Security or Insecurity: The Experience of Workers Aged 45 and Older," also showed that 13 percent of Americans 45 and older had tapped into their retirement accounts or other investments to cover day-to-day expenses. The study was conducted by AARP via telephone interviews from Sept. 3 to 21. Tough Transition For many people, the transition to retirement won't be easy—even under the best of circumstances. That is because many people underestimate how much they will need to retire. In fact, just 23 percent of workers 55 and older had savings and investments totaling $250,000 or more, according to a study published in April by the Employee Benefit Research Institute (EBRI) in Washington, DC. Fifty-nine percent of respondents had less than $100,000, and 18 percent had between $100,000 and $249,999, the survey found. EBRI also reported that the percentage of workers 25 and older who were very confident about having enough money for a comfortable retirement fell to 18 percent in 2008, from 27 percent in 2007, marking the biggest one-year drop in the 18-year history of its Retirement Confidence Survey. Meanwhile, only 29 percent of retirees said they were confident that they would have a financially secure retirement, compared with 41 percent a year earlier. “The big unknown for all of us is trying to determine how much money is enough when you’re facing decades of retirement,” says Karen Schaeffer, CFP® of Schaeffer Financial in Rockville, Md. One good rule of thumb, says Schaeffer, is to look at the expenses you know you’ll be facing, and weigh the expenses against expected income, such as a pension or Social Security benefits. Although there is a certain amount of guesswork involved with trying to determine future expenses or income, this exercise can be a good “reality check” to see how close – or far away – you are from having adequate income during your golden years. Another factor to consider is your spending. Cutting back on unnecessary expenses will help free up more money to retirement savings. Schaeffer also says that working in retirement should be an option in anyone’s financial plan. “It can be depressing to sit around and do nothing for years,” she says. “Many people find personal and professional satisfaction from being engaged with other people and the challenges of work.” One added benefit of putting off retirement for a few years beyond age 62 or 65 is that you might be able to delay collecting Social Security benefits, and receive higher monthly benefits, until the benefits are capped at age 70. Regardless of whether you think you will have to—or want to—work in retirement, don't leave your future to chance. There are steps you can take to secure a more comfortable retirement: Determine how much you’ll need in retirement, know how much you need to save every year to reach that goal, and stay on top of your finances. Finally, consider seeking the help of a Certified Financial Planner™ professional. A CFP® practitioner can help you make decisions based on your personal life goals and financial situation and give you greater control over your financial future. Consumers can locate CFP® professionals in their vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional function on CFP Board’s Web site.
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Survey: Are Your Retirement Plans on Track? |
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Recent declines in the financial markets might have pushed the horizon for retirement farther away for many people over the age of 40, according to several recent consumer surveys. How have your retirement goals fared as a result of the recent volatility?
Take Our Survey
In the August edition of It’s Your Turn, we asked readers about their back-to-school spending plans. It seems that many were in a cautious frame of mind: only 21 percent said they would spend whatever it takes; 37 percent said their spending plans would be unchanged from last year and 42 percent said spending would be the same, but they would look for bargains.
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Growing up, many of us were taught by our parents to never talk about money. The subject is viewed as being taboo, like discussing political or religious beliefs. Adult children who grew up with this mindset typically feel uncomfortable broaching this difficult subject with their aging parents. Many adults are in denial about their parents’ mortality and avoid asking questions about their estates and wills. Oftentimes they do not want to appear greedy about their inheritance or controlling of their parents personal matters. However, not discussing this vital issue can lead to significant problems in the future, says Radon Stancil, CFP®, co-owner of Diversified Estate Services in Cary, N.C. Today, we live in an age where planning ahead makes all the difference, Stancil says. The elder generation—taught to save every penny—is now experiencing considerable wealth due to burgeoning real estate and smart investments. In turn, they need to preserve those assets to plan for future life changes. Many families do not discuss finances until a crisis occurs, and then it can be too late. It is far easier to talk with parents when they are healthy than when they are incapacitated or hospitalized. Adult children can play an important role in making sure their parents’ estate is in order, as well as ensuring they are financially capable to take care of themselves for the remainder of their lives. Statistics show people are living longer and their retirement savings must be stretched to last a lifetime. It is likely that at least one parent will need some sort of assisted care in their elder years, making long-term care insurance a very wise investment. The cost of a nursing home can exceed $50,000 a year, according to some estimates, while assisted-living facilities average $24,000 annually. If elderly parents are not prepared financially for that care, the burden may rest on their children. This is especially common among baby boomers today. Many have taken on the responsibility of caregiver, which can become financially draining considering they already have their own monetary obligations. By having open discussions with aging parents now, you can help to improve their financial health, reduce potential problems and ease burdens in the future. Stancil offers the following tips that should help to make that conversation easier and more productive. 1. Pick the right time to talk. You want to make sure to have the conversation when you won’t be interrupted and when everyone is relaxed. Having this discussion during the holidays may not be the best time. You also might want to cover things in more than one conversation. 2. Maintain a sensitive stance. Don’t be judgmental of your parents. Remember, this is a difficult subject for them to discuss. You may not agree with their decisions, but keep in mind they are competent adults. A good way to set the right tone is by saying, “It’s important for me to understand your finances in case I need to help you in the future.” You could even begin by discussing your retirement strategy or plans in the event of your own serious illness or death. This helps to open the door to communication and makes it an interactive conversation where they don’t feel they are being questioned. 3. Involve an expert if needed. There are many resources available, such as CERTIFIED FINANCIAL PLANNER™ professionals, who can help manage later life decisions and financial issues for families. In some cases, it might be easier for your parents to talk about these matters with an outsider than with a family member. 4. Make a list of assets and liabilities. This is an important place to begin once the conversation starts. You’ll want to note the date and cost of assets, as this information will be needed for tax purposes if any assets are sold. 5. Establish arrangements for financial management. Your parents will want to consider establishing a durable power of attorney. This is a legal document that enables someone to designate another person to act on his or her behalf should they become disabled or incapacitated. 6. Know where important documents are kept. Make a list of all important documents, including birth and marriage certificates, wills and trust agreements, Social Security records, burial instructions, insurance policies, bank and investment statements, mortgage and real estate deeds and auto ownership records. Be sure to get bank information, including safe deposit box number and key location. Also make a list of important contacts with phone numbers such as financial advisors, doctors and attorneys. 7. Review estate planning and investments. If they haven’t done so already, encourage your parents to develop a plan to maximize their legacy for their heirs. Also be sure to discuss their investment strategy so you have an understanding of their financial well-being. This will help you plan ahead for any assistance you may need to provide down the road. 8. Understand your parents’ health care wishes. You’ll need to know where your parents stand on healthcare issues should they ever become incapacitated. If that should occur, long-term care planning is essential. Depending on their situation, long-term care insurance may be appropriate to help absorb the costs associated with nursing homes or at-home care. It’s difficult thinking of the possibility of needing care in our elder years, not only when thinking of our aging parents, but also when thinking of ourselves. What is most important to think about is how to plan ahead to avoid disagreements over care and finances. The rewards are endless, and the experience will help you prepare for your own future.
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Miami Financial Planning Clinic is Around the Corner |
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Considering the wild ride that the financial markets have put us through in recent weeks, CFP Board’s free Financial Planning Clinic in Miami on November 15 promises to be a great opportunity for consumers to get their bearings with no strings attached. Dozens of Miami-area CERTIFIED FINANCIAL PLANNER™ professionals have volunteered to take part in the Clinic at the Hyatt Regency at Miami Convention Center. The Clinic is a free event aimed at providing the public with access to ethical and competent financial planning information through no-cost one-on-one counseling and 50-minute educational workshops. There will be no selling, no marketing and no follow-up calls – in other words, no strings attached. The Financial Planning Clinic comes at a time when many families are concerned about their financial situation due to the recent economic uncertainty and volatility in the financial markets. Without exception, thousands of consumers who’ve attended past Financial Planning Clinics have expressed their satisfaction with the information they received and have indicated that their experience has helped them improve their finances. To view a brief video and consumer feedback from our September 13 Clinic, visit CFP Board’s website.
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Financial Alerts |
Learn How to Tell if Your Personal Information Has Been Compromised
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About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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