From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Leaping into Place: The Second Step in Your 12 for ‘12
So far in 2012, you’ve taken the first step toward financial security by deciding if you need the help of a qualified, ethical and competent professional to help you pull the bits and pieces of your financial life together. Just in case you are still mulling this decision over, here’s a hint: When in doubt, check a CFP®
professional out. You can go to www.letsmakeaplan.org
to find a CFP®
professional in your area and at least get the conversation going.
For those of you who have decided to use a professional, don’t assume that’s the end of it. It’s like finding a doctor to help you get physically in shape: just because you now have a medical expert doesn’t mean you don’t have to take off your clothes and hop onto to the examining table. Even with a CFP®
professional on your team, you still have a lot financial “disrobing” or discovery to do. That’s where the second step on your financial planning journey comes in. February is the month for taking stock of exactly where you stand financially. No “more or less,” no guesstimates, no assumptions: time to find out your true financial situation.
You may be thinking “I don’t have time” for all that searching and assessment. The good news, however, is that you get a whole extra day in the form of Leap Day on February 29th.
So find four or five hours of the bonus 24, sharpen your pencils and fire up your computer or tablet. To create your own personal baseline, you’ll need a copy of your most recent tax return, your last paystub, and the latest statements for your retirement and investment accounts. Assuming you bank online, download three to six months of your account statements. Dig into your file cabinet for a copy of your will, or get it from your safe deposit box. Have the phone numbers or emails of the HR person in charge of your workplace benefits and your insurance agents.
You should now be ready to answer the following questions:
- What do you have in terms of financial assets? This means all your savings and investment accounts, your real estate, your retirement plans. Maybe you have only some or none of these assets, but that’s important to note as well.
- What are your debts, both in terms of amounts outstanding as well as what you pay each month?
- What workplace benefits do you receive?
- What insurance coverage do you have to protect your health, income, life, property or need for physical assistance?
- How are your assets titled and who gets them when you are no longer here?
- What is your gross and net income, and what are your expenses?
All these “where am I now?” questions must be answered as completely as possible to create the foundation for your financial plan. Knowing your starting point is necessary for figuring out how far you have to go to achieve your goals, or if, indeed, those goals are feasible. Hint: “Setting goals” will be the next step in your 12 for ’12 program, but for now don’t get ahead of yourself. Your February task is to get as much information as possible about the state of your financial affairs. By focusing on exactly where you stand, you’ll be taking a big leap toward financial confidence in 2012.
From CFP Board Ambassador Joe Kelly, CFP®
Diversifying Your Portfolio
I have always been amazed at how consistently investors react to fluctuations in the stock markets. Every time the market goes down many individuals seem to panic, selling their stocks and sitting on the sidelines in confusion, waiting for the right time to jump back in to the trenches. These investors are unsuccessfully trying to time the market, always looking for the next trigger to bring them back.
Of course nobody can really know when “things will get better.” If we could, we would all be Warren Buffett clones. But Mr. Buffett knows the secret that the average investor has never mastered: the best way to achieve long-term wealth accumulation is based on investing in growing financially strong businesses and holding them for the long term. And, if you own enough of them, spread among different industries, you will have built a well-diversified investment portfolio.
Even if you are new to the world of investing, there are everyday examples that show how important diversification can be. We all love to eat different kinds of food –Italian, Mexican or old fashioned southern fried cooking and we all have our favorites. But for our bodies to stay healthy we need a diversified diet of dairy, meat, fruit , vegetables and maybe a taste of chocolate here and there. This is nature’s way of showing us the importance of diversification. When we begin our education we study reading, writing, mathematics, history, science and other important subjects. Our minds are exposed to a diversified field of studies to help us grow and expand our horizons. Diversification is everywhere. So, why not with your investment portfolio? A diversified portfolio can consist of several buckets of holdings, consisting of stocks and fixed income. The stock bucket can include small, mid-size and large companies both domestically and internationally-based. The fixed-income bucket can include various denominations of bonds and cash instruments. Some investment categories will be affected more than others due to economic pressures or global factors. Knowing that these factors are mostly cyclical, it is imperative to allow your overall portfolio adequate time to respond to these events. Historically, stocks tend to go up when bonds go down and vice-versa. So, over the years, while your different buckets should fluctuate inversely, a long-term investment strategy with a diversified portfolio has been shown to optimize your chances of success.
Now you might ask: how does someone set up a diversified investment portfolio? What percentage of stock/fixed income would be right for me? There are any number of choices an investor could choose but they must first determine their time horizon and risk tolerance. The time horizon is an expected time period an investor needs to achieve his or her financial goal. The greater the time horizon needs to be to meet your goal, (saving for college, for instance) the more risk an investor may be able or willing to undertake. Historically stocks have returned a substantially greater return than fixed income investments.
For a family saving for the college years the possibility of greater investment returns might outweigh the greater risk. Risk tolerance is your ability and willingness to risk your original investment for the opportunity of achieving greater overall returns. A 25 year-old investor with a long time period to invest may be more willing to accept a more aggressive investment strategy than an individual who is a few years away from retirement and has a shorter time period to recover from any short term negative returns.
Determining the appropriate mix of stocks, bonds and cash for an investment portfolio is critical for an individual to achieve his or her financial goals. This would prevent the urge to make impulsive changes in the wake of volatile market conditions. The right place to start is to establish a blueprint, your financial foundation on which to build your financial home. This is done by completing a financial plan. Financial planning is a process of assessing your current financial resources, establishing objectives and goals and developing a plan to meet these goals. It involves analyzing your current and future needs, tax and retirement planning, and assessing your risk tolerance and time horizon. Whether choosing to meet with a financial professional who can help guide discussions and offer specific advice or working out your plan individually, remember that all financial planning starts at home. Financial planning is not just for the wealthy. All families need help to be assured they are going in the right direction to meet their overall financial goals.
A good CFP®
professional can keep investors from making many of the mistakes that affect most families. For many people, meeting with a CERTIFIED FINANCIAL PLANNER™ professional can serve as an important wake-up call that their current financial habits are not moving them towards their financial goals. For those early in their careers, establishing budgets and good savings habits are critical to ensuring future expenses can be met. For those looking towards retirement, financial planning can help ensure that savings and investments are on track, develop a plan to address shortfalls and adjust investment strategies.
Financial Planning for Your Retirement
Maximize Your Retirement 'Sweet Spot' Years With This Expert Advice
Because employees typically concentrate more on gaining an immediate deduction for retirement account contributions than on how future withdrawals will be taxed during their working years, affluent people frequently retire with a portfolio of massive tax-deferred IRAs and 401(k) accounts that they must raid for significantly more than living costs to cover annual taxes on their withdrawals, according to financial advisers. However, between the ages of 59.5 and 70.5 there exists a "sweet spot" when withdrawals from tax-deferred accounts are free of penalties, but not yet mandated. This is the optimum time for investors to shield themselves by transferring some money into taxable and tax-free accounts rather than continuing to put it in tax-deferred accounts. Most advisers foresee tax rates increasing in the future, and Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
warns that "in a down market, those big taxable distributions can kill you." Strategies that can help investors maximize the 11-year window include not assuming that they should wait until they are 70 to withdraw funds from their tax deferred accounts. "After you turn 59.5, you need to make an active decision about this every year," recommends financial expert Joel Isaacson, CFP®
. He notes that a retiree in the sweet spot may pay a 3.6 percent combined federal and state tax on a $100,000 IRA withdrawal. Also worth considering is the decision to make small annual Roth conversions after you turn 59.5 while you are still employed, particularly if your income fluctuates on a yearly basis. Also suggested is leveraging a down market to convert a distressed IRA into a Roth IRA; learning whether you qualify for a state tax break on IRA withdrawals; contributing to a Roth 401(k) plan if you have access to one; and saving in a taxable account if you have maxed out 401(k) contributions. "People who want to save outside their employer's plan often want more tax deferral, so they buy variable annuities," Blayney notes. "But this is an ideal time to set up a taxable account. If we see tax rates moving up, people will get socked in tax-deferred accounts."
Weigh the Risk: Taking Steps to Reduce the Cost of Your Long-Term Care Insurance Policy
Jill Schlesinger, CFP®
says long-term care (LTC) expenses such as nursing-home care and home health assistance are largely not covered by Medicare, leaving most people with a dilemma: either purchase long-term care insurance, which is costly, or take a gamble and hope such care is not needed. "One way to reduce the cost of an LTC policy," she says, "is to choose a three- or five-year benefit period." While roughly 20 percent "will need care beyond five years ... the cost of an unlimited benefit period could outweigh the risk," she explains. Schlesinger says another way to reduce the cost of LTC insurance is to "insure a portion of your daily need, rather than the whole thing."
Your Retirement Plan Is Never Complete
Financial planners have long advised retirees to withdraw 4 percent from their savings each year, but a research paper in the Journal of Financial Planning
predicted that a safe nest-egg withdrawal rate for retirements begun in 2010 is 1.8 percent. However, another study in Retirement Management Journal argued that a safe withdrawal rate could be up to 7 percent for some individuals. The lesson to take from both papers is that good retirement planning is never truly complete; an ideal plan should be open to new ideas and research. "Market valuations," or the relative health of markets at the moment of retirement, can be a vital part of calculating withdrawal rates. Most research on withdrawal rates assumes that retirees will want to know that their savings will last at least 30 years. Some retirees, such as those with a pension, may be willing to risk having virtually no savings for a short time if it means they can draw more early in retirement. Financial coach Todd R. Tresidder suggests four steps for figuring withdrawal rates: estimate life span, assess market valuations at the time of retirement, account for variables such as inflation and investment fees, and regularly revisit the plan.
Financial Planning for Your Life Now
You May Want to Accelerate 2011 Realized Income Tax to Prepare for Possible 2012 Tax Hikes
Uncertainty about the Bush-era tax cuts is presenting a challenge to some people's financial planning efforts. "The big question is whether the Bush-era tax cuts will expire at the end of 2012," says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
. "So there's a lot of uncertainty. A lot of us assume that, one way or another, taxes will go up. And if not directly, then we may lose deductions." Planners frequently say that handling uncertainty is an integral part of their job; after all, many more people would be wealthy if they could anticipate taxes, markets, and life events. In regard to tax planning, financial expert Ann Marsh says, "an adviser or client could miss a single detail and find themselves in a whole world of pain. A single missed signature on an estate plan, paying state or property taxes in the wrong year, or failing to run an alternative minimum tax calculation all can have adverse effects … that are difficult to overstate." Nevertheless, she adds, there are numerous strategies that wealthy individuals can employ to lower their debt obligations--or at least position themselves to pay fewer taxes in the future. One big takeaway is that the 2011 tax year may be a good time to accelerate realized income while tax rates are reasonably low.
Are You Too Old to Buy Affordable Life Insurance?
Insurance expert Matt Rowles says there may be a point when life insurance is so expensive that it is no longer appropriate. "Old age and poor health will certainly drive up the cost of insurance. If it drives it to a point where it makes little financial sense, that is probably the point where life insurance is not appropriate," he says. Permanent or "whole life" policies usually are more widely available for older individuals than term-life policies, but individuals should be prepared to pay for that access, says Rowles. Gail Linn, CFP®
says establishing a legacy for a charity or a loved one is a common reason why seniors continue to pay into a life insurance policy after their dependents are on their own. "It could be someone you care about, like your children or grandchildren," she says. "Since life insurance death benefits are income-tax free, it is a great way to leverage your dollar and leave money to someone you care about." An individual will get the best deal on a life policy by looking around for life insurance rates, but for someone trying to preserve their current wealth for heirs, long-term-care coverage may be more appropriate. Like life insurance, long-term-care insurance becomes more expensive as the policyholder ages, and their general health at the time of purchase also impacts premiums.
Young Professionals Can Use These Tips for Planning Financial Success
Charles Sims Jr., CFP®
offers these insights and tips to help young professionals develop good financial habits and discipline. "Start retirement planning with your first job," he says. "If the company or organization you work for offers a retirement plan [401(k), Roth 401(k), 403(b)], sign up at your first chance. Utilize Individual Retirement Accounts (IRAs), Roth IRAs, and other vehicles if your employer has no plan." Be aware of employee benefits, including health, short- and long-term disability, life insurance, and any Health Savings Account or Flexible Spending Account dependent care options. Use credit cards responsibly, and keep the balance either at zero or as low as possible to avoid monthly interest charges. Sims says the way to get into the savings habit is to pay yourself first, and start small by putting away 5 or 10 percent of monthly gross income. Plan for an unexpected job loss or other event by stashing wages into an accessible three- to six-month emergency fund account at a bank. Work with a financial planner and an estate planning attorney to write the following four documents: a will, general durable power of attorney, medical power of attorney, and a living will. And finally, pass financial literacy skills on to the younger generation. "The significance of saving, budgeting, and growth of money over time can be taught to your children by hands-on education," says Sims. "Your children will learn and acquire family financial planning skills by watching how you handle finances."
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
The CERTIFIED FINANCIAL PLANNER™ Professional Designation 'Offers Professionals More Tools in Their Toolbelt'
Financial advisers say it is worth it to pursue the CERTIFIED FINANCIAL PLANNER™ professional designation approved by the Certified Financial Board of Standards, Inc., as there is evidence that this credential carries with it greater earnings for the average practitioner as a sign of their proficiency and credibility. "There is more consumer knowledge that the [CERTIFIED FINANCIAL PLANNER™ professional] mark is a kind of minimum standard if you want to operate as a qualified financial planner," says Gerry Klingman, CFP®
. The subjects that students must study cover an esoteric conglomeration of knowledge that collectively provides an overarching perspective of a client's financial needs and goals, and there also is continuing education once a student has been certified. "The CFP[®
certification] offers professionals more tools in their tool belt," says College for Financial Planning vice president of academic affairs Jesse Arman.
If Your Stockbroker Has a CERTIFIED FINANCIAL PLANNER™ Professional Designation, You Know They're on Your Side
There are a number of ways for investors to determine if a stockbroker is acting in their best interest. For instance, investors should look for brokers who are CERTIFIED FINANCIAL PLANNER™ professionals, which is an indication that they have received a large amount of training. In addition, the credentialing body for the CERTIFIED FINANCIAL PLANNER™ professional designation has a code of ethics in place that requires stockbrokers to put the interests of their clients ahead of their own. Another way for investors to determine if a stockbroker is putting their interests first is to ask whether the firm they work for makes a market on a recommended stock. This is important because brokerage firms could use their status as market makers to build an inventory of stocks, thereby allowing stockbrokers to take home a bigger piece of the commission or trading fee on those securities. Finally, investors should read the prospectus they are given before purchasing packaged products such as mutual funds and annuities to determine how much commission the broker stands to make if they buy a particular product.
So-Called 'Senior Designations' Are No Match Against the CERTIFIED FINANCIAL PLANNER™ Professional Designation
Some state and federal securities regulators are concerned about the high number of so-called "senior designations" in the financial planning arena. The Financial Industry Regulatory Authority has posted guidance on its website on the qualifications needed to earn such designations. The four best-known designations in seniors' finance are Certified Senior Advisor, Certified Senior Consultant, Certified Senior Specialist, and Chartered Senior Financial Planner. Of these, the designation of Certified Senior Specialist is the most academically complete, comprising a comparatively broad academic curriculum that addresses several senior-specific topics. The Certified Senior Advisor and Chartered Senior Financial Planner designations both require only three days of coursework. Many people who earn the former designation chiefly work with fixed or indexed annuities and fail to discuss the risks versus rewards that are present in any investment opportunity. Meanwhile, the Certified Senior Consultant designation requires just 25 to 30 hours of self-study, three final exams, and 15 hours of continuing education per year for the first five years. None of these designations are comparable with long-established and respected designations, such as the CERTIFIED FINANCIAL PLANNER™ professional designation offered by the Certified Financial Planner Board of Standards. Individuals with the CERTIFIED FINANCIAL PLANNER™ professional designation have undergone rigorous testing and adhere to ethical standards.
Financial Planning for Women
Women, Plan a Financial 'Date' With Your Husband to Ensure a Happy Future
Women need to talk to their husbands about their financial future to ensure that future is healthy and happy. Financial expert Jason Alderman offers suggestions for having a "financial heart-to-heart." You should schedule regular "dates" with your husband to discuss bill payments, progress, or setbacks regarding savings benchmarks; budgeting for planned expenses; and strategies for dealing with unforeseen events. Should you absentmindedly bounce a check or miss a payment, it is best to bring it up with your husband immediately rather than wait until your next financial date to discuss it or obscure the mistake. "You’ll only make matters worse and create an atmosphere of mistrust," Alderman says. You should talk openly with your husband about financial decisions and be ready to compromise so neither party becomes the villain. Touch base every once in a while on what both you and your husband think about such major matters as family size, home ownership, career changes, paying for the kids' college education, and caring for senior parents. Be sure legal and financial documents are current and represent both your wishes, including wills, power of attorney over healthcare and finances, retirement accounts, investment funds, and any other accounts that name beneficiaries or individuals who control health or finances. Couples can locate a financial planner or adviser on the Certified Financial Planner Board of Standards' website, www.letsmakeaplan.org
Financial Planning for Your Children
Save for Your Child's Education With a 529 Account
Finding ways to cut college tuition costs requires time and research, according to school and financial counselors. A lot of financial aid comes from federal sources, especially federal Pell grants, but federal funds are not always enough. Judy Moore, a high school counselor, says that families should "just worry about filling out that gap between what they can receive and what FAFSA says the family’s contribution can be." Students also can apply for scholarships, many of which can be found through an Internet search. Even when students do not believe they are able to get a scholarship, they should apply for it anyway. Students may also want to start out at a community college, where they can save enough money in the first two years to pay for their junior year at a larger university elsewhere. Student loans should be avoided whenever possible due to the amount of debt involved, says Jack W. Crow, CFP®
. Crow suggests setting up a savings account. “The 529 is the most common,” Crow says. “Parents put money back for the education of their dependent children and then take it out tax free.”
Abstract News © Copyright 2012 INFORMATION, INC.