From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
From the State of the Union to the State of You
Approximately 50 million people will tune in to this year’s State of the Union address. This annual review of the body politic, mandated by the Constitution, began with our nation’s first president and has been emulated by leaders of smaller jurisdictions as well. Many governors deliver a yearly “State of the State” or “State of the Commonwealth” speech, while the similarly-intended version for mayors is aptly called “The State of the City.” Clearly these reviews are important tools of governance and executive management at any level.
But what about households or even at the level of the individual? How many people do an annual analysis of where they stand and where they are going? Those working with a CFP®
professional probably do. While the analysis is generally called a financial plan rather than a “State of Me,” its purpose and benefits are very much the same as those of President Obama and his 43 predecessors.
The State of the Union will take President Obama an hour or more to deliver, but actually sets out an agenda that will take the entire year, if not longer, to execute. The same is true for comprehensive planning – it takes time, long-term monitoring and adjustment. To this end, CFP Board is launching a “12 for ’12 Approach to Financial Confidence” to help consumers prepare their own executive annual assessment of where they are financially, where they would like to be in the future, and how they plan to get there.
For the month of January, we will be looking at the first step in the evaluation of anyone’s finances: deciding whether you need help.
The objectivity and expertise of a financial professional is called for in the following situations:
- When you are facing a major life crisis or transition – divorce, death of a spouse or family member, loss of a job. At these stressful moments, emotions can cloud your judgment. You want an expert – a CFP® professional – who practices by a fiduciary standard, putting your interests first ahead of his or her own.
- When you realize that you do not know what you do not know. Securities markets, financial products and tax laws are constantly and rapidly changing, and without a professional who keeps current with these changes, you can easily miss financial opportunities or be exposed to significant risk.
- When a complete review of your financial circumstances is needed. You may, for instance, know you need to save more but are uncertain as to how or where to begin. A CFP® professional will look at your cash flow, tax liabilities and debt, insurance needs and retirement planning to help you find the most effective strategies.
In the coming months, we’ll focus on other important areas of your financial life, including: establishing realistic goals, tax planning, emergency and risk management, investing, retirement, debt management and estate planning.
When all is said and done, there is perhaps one important difference between the State of the Union address and a personal financial plan. When you share your plan with your constituents – namely your family and friends, you can expect the “applause” to be unanimous. Financial confidence and direction is something most everyone can rally around.
From CFP Board Ambassador Ross Levin, CFP®
Settle Down, Settle In and Settle Up
Have you ever received one of those disturbing e-mails about which you can do nothing? One where you read it and it sits with you a bit. It may be from a friend who is updating you on their health situation or someone going through transition. Heck, today it may be some pundit’s interpretation of world affairs that raises our hackles. This can be unsettling. And when most of us feel unsettled, we often quickly try to do something about it. So here are three things to do when you are unsettled.Settle Down.
Most of the things that cause us consternation go away with time. Most decisions don’t need to be made in the heat of the moment, when it is most difficult to do so. Whether you receive a nasty gram from an ex-spouse or a disappointing monthly account statement after a market correction, the most important thing that you can do is settle down. By settling down, you get more control of your initial (often emotional) response. While this response may be helpful if you have to react immediately, it is often detrimental to your financial well being. Settling down does not mean that you settle for something that isn’t right. It means that you make your decisions based on information rather than impulse.
When you settle down, you are able to look at things more carefully and make decisions that are more fact fact-based rather than based purely on intuition. Intuition should be an alarm bell to help you feel if something is right, but some alarm bells are for fire drills not actual fires. Settling down helps you assess your feelings and then mix them with the facts of your situation. For example, when you get that account statement you can see whether the asset allocation established is appropriate given your objectives and your willingness to accept risk. Owning stocks gives you more portfolio ups and downs, yet most likely, greater long-term returns. In fact, with emotion somewhat removed, you may wish to rebalance back to your original stock and bond positions by selling the some of the investments that have done well and adding to those that have done poorly. This is especially effective when you buy asset classes (large, small or international stocks as well as bonds and cash). Rebalancing is simply selling high and buying low.Settle In.
Election years are always disconcerting. Think about it. Whoever is trying to get elected needs to constantly present what is wrong with the situation or the person against whom they are running. While this negativity has proven to be somewhat successful in campaigns, it has a lingering effect on those of us who are looking at our own situation. This constant reminder of what is wrong makes us feel uncomfortable. When this is conjoined with some of things that are also happening – last year it ranged from Arab Spring, to our debt ceiling concerns, to the fragility of some of the economies in the European Union, to Fukishima – we become unsettled. Yet there is another narrative taking place. Corporate earnings and balance sheets continue to strengthen, the unemployment rate appears to be easing and the 90% of us with jobs are doing okay. World leaders are finding that they need to be more responsive to their constituencies. And there are people are banding together in society to help others all the time.
Settling in is about looking at what we can control and not worrying about what we can’t. You have power over how you spend your money, what you watch on television and what you read. You have influence over with whom you hang out and the type of conversations in which you engage. Settling in is understanding that things feel like they are moving fast, but you don’t necessarily have to. Settling in is controlling your reactions.Settle Up.
One of the best ways to settle in is by settling up. All of us have unclosed loops that make us uncomfortable. Whether it is a relationship that has not gone well or ignoring that credit card debt, settling up is taking action to productively move forward. When we have unfinished business, it corrodes the enjoyment of our daily lives. Most of us build things up to be much worse than they ever will be. In fact, if you imagine the worst possible outcome and decide you can live with it, then virtually any action will probably be an improvement from that.
Take time to write a note to someone whom you feel a need to connect, list out that credit card debt and create an action plan to reduce it, and after doing so, take a moment to reflect on how much better it feels to see things under the light rather than hide them in your darkest thoughts. And when that next unsettling e-mail arrives, write down how it is making you feel to help you decide whether you need to settle down, settle in, or settle up.
Financial Planning for Women
CERTIFIED FINANCIAL PLANNER™ Professionals Offer Investment Support to Women
The personal-finance Web site LearnVest.com is offering a three-tiered financial planning service that it plans to market toward women, 83 percent of whom have never used a financial adviser. The lowest tier on the service, which will be provided by LearnVest's staff of seven CERTIFIED FINANCIAL PLANNER™ professionals, will offer a one-time phone consultation, a breakdown of the consumer's budget, a to do list tailored to the needs of the consumer, and unlimited support via email for three months for $69. The $229 plan, the mid-level tier, includes an initial phone consultation, a five-year financial plan, a one-time progress review via telephone, and six months of unlimited email support. The highest tier, which comes in at $349, includes everything in the $229 plan as well as three phone check-ins and 12 months of unlimited email support. None of the offerings include investment advice. Susan John, CFP®
, says LearnVest's service will be good for consumers who want to develop a set of rules that are designed specifically for them and their abilities, though more sophisticated investors may not find the service useful. Other companies, including The Garrett Planning Network and myfinancialadvice.com, offer consumers access to CERTIFIED FINANCIAL PLANNER™ professionals at a cost of $100 to $300 an hour, according to Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
A CERTIFIED FINANCIAL PLANNER™ Professional Can Help Women Maximize Their Spending Power After a Divorce
Alan Kleinberg, CFP®
, specializes in divorce and widowhood, and says the most valuable thing a woman can do is to comprehend her money's purchasing power over a lifetime and what her expenses are. He notes that many women are left with a lump sum following a divorce or a spouse's passing. "If they do not have a job, the lump sum is all they have," Kleinberg says. "They need to know, how do I live my life? How do I live on that lump sum? Can I even live in my own house?" Kleinberg says the first step involves determining how much money a client has, the nature of her assets, and her expenses. The client's age is analyzed, and from that is calculated the number of years the lump sum must last. "We consider the rate of inflation, which erodes spending power, and we estimate what the money can earn invested in the markets over time," Kleinberg says. "We are very conservative because you cannot depend upon what the markets have been in the past, and we do not want our clients to run out of money. We assign a high probability of success to our objectives, knowing that as time goes on, the client can always make adjustments in her life style if we have been too conservative." Kleinberg also says helping clients understand they are responsible for matching spending with the income they receive from their lump sum is another service he provides. He says that overall, a person cannot spend more than 4 percent of her assets and be assured that her money will not be depleted. Kleinberg advises looking for a CERTIFIED FINANCIAL PLANNER™ professional, because they are trained in all facets of financial planning and have a fiduciary responsibility to the client.
Financial Planning for Your Children
To Avoid Hurt Feelings, Communicate With Your Children About the Division of Your Estate
Parents with several heirs should think about the emotional legacy they want to leave behind before determining how to divide their estate, according to estate-planning professionals. A parent may have a sound reason for treating loved ones differently, but such a decision could create long-lasting problems for heirs who may believe everything should be equal to be fair. Heirs may understand why a parent left more to another sibling, but it will still hurt, according to Lynn Ballou, CFP®
. "I've seen families where the money wasn't left evenly, and it's devastating," says Ballou. Of course, there is no one-size-fits-all approach to dividing an estate, and some heirs may support a decision to leave more to a sibling who is struggling financially. And regardless of how parents decide to divide their estate, they should communicate their desires to their family. Clear communication will help save the family a lot of heartbreak, and will enable heirs to make sure their parent's wishes are fulfilled. "It is their decision, and sometimes other family members forget that," adds Nancy McCready, CFP®
Financial Planning for Your Life Now
Pay Down Your Credit Cards and Save Money for a Rainy Day
Consumers are thinking differently about debt as a result of the recession, and there are a number of steps they can take to reduce their credit card debt. Ken Robinson, CFP®
, says consumers will need to learn to live on what they have, rather than what they are borrowing, to break the debt cycle. He suggests removing credit cards from wallets to stop impulse purchases, and instead using only cash and checks. "An impulse purchase is anything we buy that we didn't even know we wanted when we left the house," says Robinson, author of the book, "Don't Make a Budget: Why It's So Hard to Save Money and What to Do About It." Consumers should make more than the minimum payment, and should try to pay a little more every month. "See how far can you go before the rest of the wheels fall off your financial life, then maybe pull back a little," adds Robinson. Consumers should start a rainy day fund, which can help them put down the credit cards. Connie Stone, CFP®
, suggests putting two-thirds of available money toward credit card debt, and one-third into savings. Stone also says refinancing a home loan could help free up money for high-interest credit card debt, and loans from relatives could be a solution.
Resolve to Reduce Your Debt and Save in 2012
The beginning of a new year is the perfect time to set realistic financial goals, including reducing debt and saving more. Susan Veligor, CFP®
, suggests starting off with a budget that lists priorities and gives a general idea of each month's spending. Credit cards should not be used unless the whole balance can be paid off every month. Good interest rates could mean saving money by refinancing a home. People should look for ways to trim spending, such as forgoing eating out and buying high-price coffee. Packing a lunch and bringing coffee from home can add up the savings. Veligor also recommends opening a "club" account at a local bank, which should be fee-free as long as the holder continues to contribute to the account.
The CFP Board's Web Site Is a Valuable Resource to Use to Help You Save
Although many people resolve at the start of a new year to save more money, few actually accomplish that because such a goal is too vague. Instead, consumers should identify a specific reason for why they want to boost their savings. Among the reasons that could be used to justify an increase in savings are the need to build up an emergency fund or the need to pay for retirement. After a specific reason has been identified, consumers should determine exactly how much they need to save and when they need to have the money. Once a dollar amount and a target date have been identified, it is easy to determine how much money needs to be put away each month in order to achieve the stated goal. Finally, consumers should use automatic online transfers and direct deposits to save money without even having to think about it. More savings tips can be found at the Certified Financial Planner Board of Standards' Web site.
Financial Planning for Your Retirement
The Financial Reality Has Changed, So You'll Need to Plan for Your Retirement Accordingly
The Great Recession has brought about a new age of retirement planning, throwing a wrench into most people's carefully crafted plans. The Baby Boomer ideal of expecting more out of life must be reconciled with the new reality that many people will not have enough time to fully recover their losses and will have to learn to live better while spending less. There are five main points that financial experts say people should understand--they will live longer than their parents and should expect to live to 95; inflation will return; healthcare costs will keep rising and Medicare may be in danger; the stock market should be counted on for at best a 6 percent return, not the former 10 percent; and retirement is an opportunity that should be planned for. Many retirees are changing their expectations, planning to work longer but also planning to enjoy life with a rewarding part-time career, travel, volunteering, or consulting. Old rules like saving at least 10 percent of income for retirement still stand, but others are out of date. Connie Stone, CFP®
, tells clients they should expect to need 100 percent of their current income in retirement, not the former target of 75 percent. "A lot of people spend in retirement the same they were spending before," she says.
Chances Are, You'll Need More Money in Retirement Than You May Think
Most people are not aware of the amount of money they will need to have a secure retirement, writes Carolyn Philpot, CFP®
. In her work with clients, she says most of the time they are shocked to find out how much they need and are usually far from attaining that goal. But she says she eventually realized that she, too, needed to take care of her own financial situation and not make the same excuses her clients did to put it off. Keeping retirement goals in mind at all times and constantly working toward them is much like the constant maintenance one needs to do on the body with exercise and diet to stay healthy. The principles are the same and the goal in each scenario is a number, be it weight or a nest egg. One of the biggest mistakes people make, Philpot says, is simple calculation errors based on a wrong assumption that retirement assets will produce a constant income stream in retirement. Rates of return vary over time, and inflation alone can do a lot of damage to retirement income--for example, a 65-year-old couple that needs $106,891 at year five of retirement will need $252,611 by year 30 assuming an inflation rate of 3.5 percent. So even if a couple starts retirement with healthy finances, things change as inflation erodes their nest egg. And this does not take into account charity and leaving money to heirs, nor tax rates. But the earlier one learns their number, the easier it is to keep it in mind as a long-term goal, and the less shocking and depression-inducing it will be.
If You Want to Retire This Year, Make a Financial 'To Do' List
Workers hoping to retire in 2012 should make a to do list now to help smooth the transition financially and emotionally. The first item on the list should be to track one’s spending closely, as up to this point retirement planning has likely been based on spending estimates but a specific picture will be more helpful when retirement is imminent. This means examining the past few months’ worth of bills and expenses as well as an ongoing list of spending. It could take up to a year to really get a handle on how one is spending one’s money, says financial expert Jonathan Guyton, CFP®
. The next thing on the to do list should be to adjust income expectations--the financial crisis has hurt many a nest egg, and some people are in denial about how much money they will be getting from investments. The next concern is Social Security; the government can give an estimate of the size of the first check, and this will be helpful in deciding when to start taking benefits. Delaying means larger checks, but will cut into savings. Working with an adviser can help to calculate when is the best time to begin. Next on the to do list is to build a cash reserve to protect against having to sell off stocks or bonds at a bad time. And finally, one must find a way to prepare emotionally for being retired. It is a completely new lifestyle, and many struggle with loss of identity after ending a career. Guyton suggests people approach retirement with the idea that they are “retiring to something” rather than “from something. If your definition of retirement is framed in terms of what you are leaving, you are setting yourself up for a much more difficult transition emotionally."
Protect Your Retirement Assets by Purchasing at Least Some Long-Term-Care Insurance
Long-term-care insurance plays an important role in people's retirement plans, but many are unaware of how to pay for it, according to a recent poll by the Harvard School of Public Health. Another recent report found that just under 15 percent of individuals over age 60 have such coverage. Although financial advisers tend to focus on the best coverage possible, other options may actually be more realistic. For instance, people in their 60s could get a long-term-care policy for about $1,700 a year that provides $50 a day for life once a claim is filed. This may appear like a small amount, but that coverage could be coupled with a person's savings to prevent their other assets from being depleted. Policies that provide $100 a day for three years, with a 3 percent compound inflation rider to reflect rising costs, can be obtained for roughly $1,500 a year for a single individual age 60, while for a couple that coverage would cost about $2,400, according to financial expert Bill Comfort. Coverage that provides $100 a day provides $36,500 annually, which could be an adequate supplement if long-term care is needed. Financial expert Claude Thau says he usually recommends coverage of at least $150 a day, with 5 percent compound inflation coverage, but policies that pay out $100 a day can be beneficial if they are part of a well-thought-out plan.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
Build Your Financial Dream Team With the Help of a CERTIFIED FINANCIAL PLANNER™ Professional
The new year is a good time for investors to reevaluate the team of people they count on for financial, accounting, and legal advice, and there are steps they can take to find the most suitable Trust Team. One sign of a good financial adviser candidate such as a CERTIFIED FINANCIAL PLANNER™ professional is the completion of extensive coursework and exams to acquire credentials that also require broad work experience and additional continuing education every year. It is a wise move to interview various candidates before making a selection, and sources to find candidates include professional Web sites such as the Certified Financial Planner Board of Standards, Inc.'s site. Queries to make of financial planners include what kinds of services they provide, the fees or commissions they charge, whether they will be acting as a fiduciary, how often they will engage in dialogue with the client, whether they have been disciplined by a professional or regulatory body, and their style of money management. Above all, the investor should feel comfortable with the adviser.
Your CERTIFIED FINANCIAL PLANNER™ Professional Is Highly Trained and Adheres to the CFP Board's Ethics Code
The CERTIFIED FINANCIAL PLANNER™ professional designation is given to those who pass a board exam from the Certified Financial Planner Board of Standards, Inc., and knowing what this involves can help one to choose a financial adviser. Those who want to take the exam must first qualify by having at least a bachelor’s degree from an accredited school, and the exam itself covers the areas of estate planning, retirement planning, and estate, gift, and transfer tax planning, as well as investment and securities, state and federal income tax, asset protection, employee benefits, and insurance planning. Classes in all of these topics must be taken to qualify to sit for the exam, which is a two-day ten-hour test. And once the test is passed, the individual must have worked at least three years full-time as a financial analyst and show they have experience in at least one category including establishing and defining client relationships, gathering the client's data and goals, analyzing and evaluating the client’s financial status, developing and presenting financial planning recommendations and alternatives, implementing the financial planning recommendations, or monitoring the financial planning recommendations. Only after all of this is complete may the person receive the CERTIFIED FINANCIAL PLANNER™ professional designation, and to keep it they must attend continuing education and follow the CFP Board’s code of ethics. When choosing a financial adviser, the CERTIFIED FINANCIAL PLANNER™ professional designation is one way to separate out the best of the breed. It is not a guarantee, but it puts the adviser on a higher level than peers.
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