From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Never too Late to Save: Planning for Retirement in the Face of Today’s Economic Challenges
Who loves the month of August? There are no days off for a major holiday, the thermometer generally stays stuck in the 90s for days at a time, Congress is on recess and there is even a lull in corporate earnings announcements. Even the daily dole of junk mail is bland and uninteresting. The holiday catalogs don’t start coming till next month.
Yes, August is undoubtedly a month of the “doldrums.”
Americans are currently in the doldrums about their retirement planning as well. According to the 2012 Household Financial Planning Survey
, jointly conducted by CFP Board and the Consumer Federation of America, the tough economic environment has taken a toll on American’s readiness for retirement. Pre-retiree savings for retirement has dropped over the past fifteen years, the most significant drop being among those aged 45 to 54. Another depressing indicator: more Americans are taking early Social Security benefits at age 62, rather than waiting for higher benefits at full retirement age or even later. If asked why they made this early benefit election, most recipients would likely answer: “I had to. I had no choice. I need the money now.”
When a financial goal seems completely out-of-reach, a natural instinct is to give up planning for the goal altogether. Why think about retirement when you haven’t saved enough or have lost much of your home equity and you are in your 50s?
There is, however, a better way to think about a seemingly impossible goal. And that is to “redefine” the goal itself. Let’s take the word retirement – or at least the idea of it – for example. The economic challenges we face notwithstanding, the concept of retirement needs to be updated in a number of ways to reflect the realities of our current lives. Our parents or grandparents may have been content to get the gold watch, and take to the porch rocker, but that vision needs to be discarded along with dial-up internet, Polaroid photos and rental movie stores.
Today’s retirement is no longer a moment in time when we stop working and start relaxing. It’s not the day we file for Social Security, or start taking our required IRA distributions. Instead, we must think of retirement – work or no work – as the last third of our lives where we strive to be healthy, independent, active and productive for as long as possible. By defining retirement as an unfolding path – and not a cliff - there are so many more planning strategies for making those years as financially secure as possible.
To understand what retirement planning can be, let’s focus on what it is not:
- Retirement planning is no longer getting to a “number.”
Having a specified net worth is not the prerequisite to a secure retirement. What’s necessary is to know how to adjust your lifestyle to what you do have. If our retirement plan balances are flagging, we need to pay attention to our cash flow, and learn to live within our means. The reality is that there are millionaires going broke in retirement as well as individuals thriving just on Social Security.
- Retirement planning is not about choosing a single investment product or asset allocation “glide path.” There is no one product, fund or savings account that will take care of all your retirement planning needs. For example, annuities may generate a steady income, but don’t provide liquidity for big unexpected expenses. Target date funds may take care of portfolio rebalancing, but may not respond well to unexpected market events. Saving only in a 401(k) or IRA gives you great tax advantages while you are accumulating, but does not provide the tax flexibility of an after-tax savings or investment account when you start to withdraw.
- Retirement planning is not about preparing for a guaranteed, predictable source of income. As Ford and GM workers are now discovering, the era of defined benefit pensions is fast coming to a close as companies want to avoid the high costs and indefinite liabilities of this type of retirement plan. Social Security is only as secure as the political will to keep financing the program’s growing costs. The American retiree is increasingly on his own to generate income for his retirement, and for many, this means continuing to work, in some capacity, for some portion of those final years.
- Retirement planning is not just about becoming financially independent. The reality is that most of us must plan for our dependence – on others for medical care or financial decision-making – as well. We may need to address a shortfall in retirement savings, by exploring housing options that are more cost-effective than living alone or staying in the family home, such as shared or cooperative housing. We may need to understand what community resources and services are available to the aging.
It should, in fact, come as good news to Americans anxious about their retirements that success depends on so many more factors than just the diminished balances in their 401(k). Managing taxes, debt and expenses makes a big difference, as does having enough of the right kind of insurance, choosing the best medical plans for your circumstances, and drawing up estate planning documents. If it takes a village to raise a child, it may take many experts to help us retire.
Better still, it takes one advisor – a CFP®
professional with competence and training in all areas of financial planning – to get us unstuck and out of the August-style doldrums which has so many of us believing that retirement is now an impossible dream. With some thoughtful and comprehensive planning by a professional who puts our interests first, we can move into the autumn of our years with a sense of confidence and unfolding possibilities.
From CFP Board Ambassador Scott Kaminsky, CFP®
What do Professional Athletes, Successful Businesses and Well-Constructed Buildings Have in Common? A Plan!
I’m always amazed when I hear people say that they are not interested in “doing any financial planning.” Quite often, I run across individuals who want to jump right into the investments and forgo the financial planning process. I do understand why. I don’t agree, but I do understand. It’s human nature to want to start with the things that present the possibility of instant gratification. The only problem with this mentality is that more often than not, it leads to financial ruin if done with no plan of action. Let’s take a look at a few different situations that operate under the umbrella of a well-constructed plan.
If we take the time to lift up the hood of any successful business, we will see a well-oiled machine that began with a prudent plan of action. What are the short-term goals of this company? What are the long term goals of this company? What will the business owners do if their plan runs into a stumbling block along the way? Is there a backup plan to enable this business to continue in the face of unexpected adversity? Before any successful business opens its doors, I can assure you a well thought-out, prudent business plan has been constructed. More often than not, the businesses that fail lacked a concrete business model. Either they prepared a business model that was poorly executed, or more likely, they just winged it. Unfortunately, too many individuals today treat their finances in the very same manner - they either attempt to construct a financial plan with no professional help or just wing it - and it’s no surprise we see the financial hardships that are far too prevalent in today’s society.
When a professional athlete sets foot on the court, field or ice, they do so with a plan of action – a game plan. Countless hours go into these game plans by the managers, coaches and assistant coaches. It would be virtually impossible for a Major League pitcher to compete at the level they are expected to without knowing what a particular batter’s tendencies are and formulating a game plan to prepare for those tendencies. An NBA team could never compete without a plan for playing into its players’ strengths and its opponents’ weaknesses. The same holds true for any professional athlete in any sport. To give any athlete his best opportunity for success, planning is paramount. Many times a team will prepare and still lose, but the fact that they are able to compete at that level means considerable time and effort went into creating a game plan that anticipated their every move on the field, court or ice.
Take a look at your home or the building where you work. These buildings were constructed from a blue print. These blue prints were drawn up after many hours of well thought out ideas that were discussed between the builder and the owner of the home or office building. Without these blue prints, one of a few scenarios would occur; either the rooms would be the wrong size, the electrical system would fail causing a fire in the building, or worse yet, the building might collapse. The bottom line is that without a blue print, construction would be impossible.
So we need to ask ourselves the question – If we know that successful businesses run on solid business plans, professional athletes play under a well thought out game plan, and buildings are constructed only after a blue print has been created, then why on earth would an individual ever attempt to manage their finances without first employing a well-constructed, well thought out prudent financial plan prior to investing one dime of their hard earned money? “An ounce of prevention is worth a pound of cure” is a saying that you will find me using time and time again with the individuals I come across. This concept is particularly meaningful especially in the world of personal finance. Far too many financial hardships might have been avoided if only that “Ounce of Prevention,” concept would have been embraced.
Everyone reading this owes it to themselves to take the time to sit down with a CFP®
practitioner and construct a financial plan that will allow you to live your life with the safety, freedom and confidence you deserve. You've worked far too hard to leave your personal finances to chance. Businesses, professional athletes and builders don’t take chances, so why should you?
I wish you success in your financial endeavors!
From CFP Board Ambassador William G. (Greg) Dorriety, M.S., CFP®
The Importance of Having a Long-Term Care Risk Mitigation Plan
One of the key components of any comprehensive financial plan is developing a strategy to address the issue of long-term care risk during one’s retirement. Research shows about 70 percent of people age 65 or older will need long-term care services at some point during their lifetime. And while most people think of long-term care as impacting only those in their senior years, 40 percent of people currently receiving long-term care services are ages 18 to 64.
Many people think that term long-term care (LTC) means nursing home care. However, this understanding is misleading. Long-term care actually includes in-home care, assisted living, and skilled care (nursing home). These levels of LTC do not necessarily occur in any predictable sequence. According to the Genworth 2012 Cost of Care Survey, in my home State of Alabama, the current cost per/year for these different needs are approximately:
In-home care: $36,500/year
Assisted Living Facility: $36,000/year
Nursing Home: $64,000 (semi-private room)
The average inflation rate is approximately 4.28 percent per year. These costs can vary depending on your state of residence.
Another myth regarding long-term care is that Medicare will cover most of the costs. Medicare may pay for up to 100 days of care in a skilled nursing facility per benefit period — 100 percent for the first 20 days (after a three-day hospital stay, provided skilled care is needed). Then, during days 21-100, Medicare requires a co-payment. To help cover the co-payment, many seniors also have a Medicare supplement insurance policy. In general, once Medicare stops paying for care, the supplement payment also will end.
With these considerations in mind, a LTC need of three years could cost a family between $100,000 to $200,000 in 2012 not including future inflation! Therefore, it is essential that clients have a plan in place for not only the financial, but also the emotional aspects that are introduced. A LTC economic impact analysis is a good place to start helping individuals and couples with their decision process on the most appropriate action to mitigate LTC risk. This analysis compares paying for LTC services out-of-pocket with their current resources or supplementing these resources with a long-term care insurance policy (LTCi).
There are a wide variety of LTCi products available. The most common and cost effective product is the standard LTC policy customized to meet a client’s potential needs and budget. However, this approach is vulnerable to unpredictable premium increases at the insurance company’s discretion with State approval. Recently, one insurer increased their overall premium over 40 percent. Also, with no refund of premium selection, if you do not use it you will lose it. Combination “Combo/Hybrid” LTCi/Life and LTCi/Annuity products have generated considerable dialogue in professional and public media. Several features make Combos an attractive alternative. Most prevalent seem to be the clarity of value, flexibility to surrender the policy, consistent premium, and a death benefit or annuity value if no claims are filed. However, Combos typically require a considerable upfront single premium, which may not be an affordable option for many clients. Also, an important difference is the lump sum Combo premium is first used to pay LTC claims, which reduces on a dollar for dollar basis, the Hybrid death benefit or annuity value.
Even a modest LTCi plan, covering part of the risk, should be of interest to all clients. LTC risk is universal, unbiased, and an urgent topic while you are healthy, insurable, and have access to the more favorable age based premiums. LTCi is a powerful tax-advantaged tool to protect lifestyles, enhance legacy planning, and provide liquidity at time of care. Fortunately, in spite of a difficult environment in the LTCi industry, LTC financing, and the general economy, the insurance industry offers a wide variety of tools with great value for clients wishing to offset LTC risk.
Hopefully clients and their advisors have objective factual information on which to make these important critical decisions. Depending on circumstances and client objectives, there are a variety of products to meet their needs. Traditional LTC insurance, hybrids, LTC riders on life/annuity products, and the new Longevity Annuities all have a place in trying to find the client optimum value and protection.
Financial Planning for Your Life Now
Focus on Your Long-Term Financial Security, Using This Advice From the CFP Board
Financial insecurity has reached unprecedented levels as more people overlook long-term financial goals to pay for necessities. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
says consumers can revive their long-term financial security by adhering to an intelligent, sensible strategy to investing. Creating an investment strategy is one of the steps in the CFP Board's year-long "12 for '12 Approach to Financial Confidence." "Aspirations of owning a home, providing for a family, and retiring comfortably are being hampered by today's financial necessities," says Blayney. "By prudently investing now, one can open up the future to the possibilities the American Dream promises." Among Blayney's recommendations for consumers when creating an investment plan is to invest in what they understand. Unfamiliar or complex investment areas or derivatives can lead to failure, so consumers should first concentrate on creating cash reserves for their future needs. She also advises that consumers be prepared for losses as a necessary part of investing. For instance, when a person opts for only cash or fixed-income investments and avoids equities, he or she is adversely affected by inflation and diminished wealth in the long term. Even if a consumer has few assets, he or she should start investing now anyway, says Blayney, such as by eliminating one or two small expenditures and using that money to start investing.
Having a Financial Plan Can Boost Your Confidence
A new survey by the Certified Financial Planner Board of Standards and the Consumer Federation of America finds that many more U.S. households are fighting to make ends meet today than they were in 1997. Although attitudes have shifted over time, Kevin Keller, CEO of the CFP Board, says there is one constant: "People who have a financial plan feel more confident about their financial future and report more success managing money, saving, and investing." And when low-income households have a financial plan, the survey found, they are more likely to pay their credit card bills in full and avoid debt. Among the survey's other findings: Only 31 percent of Americans have put together a financial plan, the same percentage reported in a similar survey from 1997; 38 percent of Americans live paycheck-to-paycheck, versus 31 percent 15 years earlier; 48 percent of families with college-bound kids are saving for their education, down from 56 percent in 1997; about half of Americans are behind in retirement savings, compared with 38 percent in 1997; and only 34 percent of Americans believe they can retire at 65, down from 50 percent in 1997.
Look Over Your Finances Now to Prepare for the 2013 Tax Season
Lynn Ballou, CFP®
recommends that households use the relaxing days of summer to dust off financial goals and make sure everything is on track before next year's tax season. First, look at income tax withholding to see if too little is being withheld, which could result in a crippling tax bill come April, or if too much is being withheld, which gives the government a tax-free loan. Second, go over the monthly budget to make sure money is being put away regularly into a 401(k) or other type of retirement account. Ballou says if someone is behind in their goals this year, there is still enough time left to make up for it by January. Third, when the time comes around to renew an insurance policy, instead of suffering through a long and difficult-to-understand policy -- or not reading it at all -- call the insurance agent and ask them to go over the policy over the phone or in person, breaking down line by line what is and is not covered. Fourth, realize that volatility in the markets is here to stay, and pay attention to how investment portfolios are performing. If a person's retirement plan does not reflect their true risk tolerance, Ballou suggests contacting a CERTIFIED FINANCIAL PLANNER™ professional or other trusted adviser to help walk through an in-depth review. And finally, take stock of what major items may need repairing or replacing in the next few years.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
Hire a CERTIFIED FINANCIAL PLANNER™ Professional to Help Develop Your Financial Plan
A new report from the Certified Financial Planner Board of Standards and the Consumer Federation of America (CFA) reveals that many families are struggling to save for future needs, although those with a financial plan do better in meeting their goals. Just 36 percent of the 1,508 household financial decision makers surveyed in the report said they have ever prepared a comprehensive financial plan. Older respondents and those with higher annual incomes were more likely than middle-income families to have a financial plan. Nearly 38 percent of households said they live paycheck to paycheck, and less than 30 percent said they felt comfortable financially. Only 34 percent believe they can afford to retire by age 65, according to the survey conducted by Princeton Survey Research Associates International. Kevin R. Keller, CEO of the CFP Board said, "Consumers understandably are more nervous about investing their money given recent revelations about financial fraud, manipulation, and abuse of clients. This doesn't mean that people shouldn't create a financial plan and be prepared. We encourage consumers to do their homework and find a financial professional who always puts the clients' best interests first and abides by a fiduciary standard of care." Both the CFA and CFP Board urge consumers to assess their financial condition and develop a plan, especially by using useful tools like the LetsMakeaPlan.org Web site. The site lists questions an individual might ask of a financial planner in addition to warning them about red flags.
CFP Board Kevin Keller talks about CFP Board and the Fiduciary Standard
Jill Schlesinger, CFP®
tells the Chicago Tribune why the Certified Financial Planner Board of Standards believes the fiduciary standard as proposed under the Dodd-Frank financial reform law should apply to all financial professionals. The fiduciary standard requires financial professionals to act in their clients' best interests. However, some financial professionals, including brokers and insurance agents, currently are held to a much looser "suitability" standard, which merely requires them to sell products to clients that are suitable but not necessarily in their best interests. According to Kevin Keller, CEO of the CFP Board, "The CFP Board is first and foremost a nonprofit public interest organization, which is why it formally adopted the fiduciary standard in May 2007. In so doing, the Board requires all CFP®
professionals to put the interests of their clients first." Schlesinger notes that "given investor cynicism and public distrust of financial institutions," the wise approach would be for financial professionals to adopt a standard that ensures clients their investment interests come first. Keller observes that "the public is best served when financial professionals have standards," which is why he thinks that "financial planning should be a recognized and regulated profession." To help educate consumers on the issue, the CFP Board is conducting a public awareness campaign that calls attention to the differences between various financial service professionals.
Financial Planning for Your Retirement
If You're Eligible for a Pension Buyout, Weigh Your Choices Carefully
General Motors and Ford have offered employees the option of taking a one-time pension payment in lieu of collecting a monthly check, and Marilyn Capelli Dimitroff, CFP®
believes this could be the beginning of a trend for many companies. For retirees facing a decision on a pension buyout, she says the factors to consider include other sources of income and life expectancy. A buyout may make sense if the retiree does not expect to live for very many years, says Dimitroff, a CFP Board Ambassador. The lump sum would give retirees the flexibility to put money into investments that have the potential to grow faster than inflation, according to Dimitroff. However, she notes that the monthly pension will be the best option for most people because it provides some certain income. Ideally, the nest egg retirees also have accumulated can be invested in stocks, bonds, and other assets. "That can be used to mitigate the impact of inflation," she says.
Dipping Into Retirement Savings Now Will Put Your Retirement Portfolio at Risk
More and more financially distressed workers are dipping into their retirement accounts -- a practice viewed by financial planners as the "cardinal sin" of saving, according to this article -- for short-term relief at the expense of their long-term financial security. About 45 percent of workers who participated in a 401(k) plan said they have taken a withdrawal from their account -- 63 percent of the unemployed and 35 percent of the underemployed, according to research from the Transamerica Center for Retirement Studies. Many 401(k) plans let employees working for a company take loans against their plans, as long as they pay it back over time. Workers with an individual retirement account, however, cannot borrow money from it, though they can withdraw from it before retirement. Dipping into retirement funds early often comes with steep costs, which can include: Money in a 401(k) fund that would otherwise be earning interest is lost; the loan must be repaid within a month or two of leaving the company or else the loan is considered in default and treated as a taxable distribution; loans are paid back into a 401(k) with after-tax money, which eventually gets taxed again once it is withdrawn at retirement; and workers who withdraw money from their 401(k) or their IRA before they are 59.5 years old have to pay a 10 percent penalty, in addition to taxes on the extra income. The average 401(k) account is not flush to begin with, according to Transamerica, which also found that workers in their 40s and 50s had an average of $2,300 in their accounts. Another recent poll by the Certified Financial Planner Board of Standards and the Consumer Federation of America found that only one in three household financial decision-makers believe they will be able to retire by age 65.
You May Want a Different Investment Strategy Than the One You Had Four Years Ago
Roger Wohlner, CFP®
reflects in this article on what investment advisers might have told their clients differently had they been able to foresee the near-crash of the stock market four years ago and the years-long recession that followed. One suggestion would be to allocate portfolios in a way that is consistent with client goals and risk tolerance. Second, Wohlner says the strategy of abandoning stocks and moving to cash or treasuries was popular in 2008, but not so much in 2009. The "smart money" who left their stocks saw huge drops in their portfolios, Wohlner says, and many of them never returned to the market to experience what he calls "one of the great recoveries in market history, compounding the damage to their portfolios and perhaps to their retirement dreams." Wohlner admits that 401(k) savings plans need some updating, even while many of his clients have amassed ample retirement savings using a 401(k) as their primary retirement vehicle. Beginning this year plan sponsors must provide plan participants with disclosures as to the costs and relative returns of the investments offered by the plans. "These disclosures will show in dollar terms how much is being deducted from their accounts to pay the costs of running their 401(k) plans. This should be an eye opener for many," Wohlner says.
Financial Planning for Women
Women, Your Longer Life Span Requires Careful Financial Planning
Because women tend to live longer than men, they need to factor a longer life into their retirement planning, writes John P. Napolitano, CFP®
. Women’s money may need to last longer than men’s, which may mean investing differently. Some insurance products may be a good idea for women, particularly long-term care and annuities, which cannot be outlived. Social Security considerations may be different for women as well, as the monthly amount gets larger the longer a woman waits to start collecting. Waiting can yield more money overall for a woman who lives 10 to twelve years past age 70. Women who are married should also consider extra costs they may incur after the death of a spouse--home maintenance, for example, particularly if the husband formerly took care of most of it, and which can end up taking a bigger chunk out of one’s cost of living than expected.
Women, Financial Stability Is Possible After a Divorce
Financial expert Jeff Landers recommends that recently divorced women who might not have as much of a grasp of financial inner workings as they would like look to a trained financial adviser for help. Many CERTIFIED FINANCIAL PLANNER™ professionals are sensitive to the needs of divorced women, and can help those women who recently set out on their own with tasks like creating a budget, investing, planning for retirement, saving for college, saving for children, and so on. A financial adviser trained in dealing with post-divorce finances can help newly single women to understand their goals and their aspirations, and bring those in line with what they can afford. The adviser can also walk women through the process of cutting financial ties with their ex-husband, including removing his name from things like credit cards, insurance policies, property titles, utility bills, and beneficiary accounts. Making the transition from married to single life can be difficult financially, but having an adviser can expedite and ease the process, according to Landers.
Financial Planning for Your Children
Tapping Cash for Your Child's Tuition
Walt Romatowski, CFP®
discusses how baby boomers can help pay for the college education of their children in a personal finance Q&A. The questioner notes that he has certain buckets of money to tap into, including about $60,000 in stocks, bonds, etc.; he has $25,000 in cash and his wife has $70,000, and wants to know if he should use liquid cash to start on the $30,000 per year tuition. He also says they are in their late 50s, and have life insurance policies with a total cash value of about $14,000, other retirement savings in 401(k) accounts they do not plan to touch, and he also has two pensions coming at some point. Romatowski writes that he will assume that the questioner's retirement savings will allow him to live comfortably during his retirement years, encourages the questioner to factor in retirement expenses related to health insurance and possible long-term care, and to maintain an emergency fund in case of a job loss or inability to work for any reason. Romatowski also encourages the commenter to consider obtaining financial aid for his daughter. Before addressing where to draw money from, Romatowski indicates the commenter and his wife are allowed to gift up to $13,000 per year under current law, and they can avoid the possibility of exceeding the annual gift tax exclusion amount by taking advantage of the "educational exclusion for payments made directly to a qualifying institution." Romatowski writes that he would start with the cash the questioner has in hand, and that he could also withdraw some or all of the cash value of his insurance policy.
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