From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
March to Financial Success
It’s March – the month of madness – and not just for the green beer and college basketball playoffs. A major political playoff has captured Americans' attention as Republican candidates drive hard toward their goal of securing the GOP nomination. Given the number of turnovers in this race, we might expect some spectacular outside shots right down to the buzzer, in the form of three-point plans and promises to fix what ails the American economy.
The critical question – for all political candidates, of any party – is when do promises become actual goals? The vocabulary is different: promises are made, kept or broken, while goals are set, met or missed. Both, however, entail a vision of the future, and both require accountability.
In the context of financial planning, goals become the important promises we make to ourselves, the date we keep with our future. Where do we want to be, in two, 10, 40 years time, in terms of where and how we wish to live? What do we want for our children? What do we want for our communities? Our legacy?
To date in our year-long 12 for ’12 Approach to Financial Confidence, we have created a foundation for setting our goals. In January, we determined whether we need outside expertise. In February, we took stock of our financial resources and circumstances. Without establishing this foundation – one built on defining exactly what we need and where we are – we have little, if anything, to support a vision for the future and define goals that can affect that vision.
So in this mad month of hoops and hopes, CFP Board is offering this sane and sensible way for consumers to set their financial goals:
- Your goals should be motivational, but also realistic. Just about everyone wants to retire a millionaire at 65, but if you are 60 years- old, with $50,000 in your 401(k), something has to give. Perhaps it’s the date of your retirement, or your hoped-for lifestyle. Setting goals that are out of reach have the perverse consequence of keeping you stuck exactly where you are.
- Short-term goals can be just as important as the long term. Our political candidates seem to understand this, perhaps a bit too well. At times, they seem to set their sights not much further out than “beating the other guy in 2012.” However, without that short-term win, there is no long term. The same can be said for consumers and their finances. Without tackling the immediate problems of debt, or under-earning or failure to save, you will never get a chance at that vacation home where the kids and grandkids will visit each summer. Remember, too, that short-term goals, once met, have a way of accumulating into long-term successes.
- Setting goals also requires establishing priorities. There is, in other words, an opportunity cost for every goal that must be taken into account. To reach, for example, the goal of no longer needing a paycheck at age 65 may preclude the possibility of paying for graduate school for your son. Each goal may be perfectly realistic on its own, but the decision needs to be made at the outset as to which is more important.
- Recognize the importance that time plays in the formulation of your goals. It’s a common mistake to specify a future goal in terms of today’s dollar amount. For example, a young couple may set a goal of having $50,000 for a home purchase in 10 years time, failing to factor in the possibility that in a decade the necessary down payment for the home may be $55,000. The $250,000 reserve you wish to set aside for medical costs not covered by Medicare may, in reality, need to be double by the time you reach retirement. By mis-specifying the goal, you set yourself up for choosing the wrong financial strategies later in the planning process.
- Be flexible: your goals may change almost as soon as you set them. This, in fact, is the essence of the financial planning process: new opportunities, unforeseen personal circumstances and volatile markets may happen, requiring you to reset your financial destination, in terms of where you want to arrive and by when. Just because the target changes, it does not mean it is no longer worthwhile taking aim.
Here’s one more recommendation for your March financial goal-setting –a hint so obvious it almost does not deserve saying, except for the fact that far too few of us do it: put your goals in WRITING. If you are working with a CFP®
professional, this will certainly be part of his or her practice. It’s been established by research studies time and time again: when you have written goals, as part of a written financial plan, your chances of financial success go up significantly.
From CFP Board Ambassador Neal Van Zutphen, CFP®
My father died unexpectedly when I was 20 years old. To make matters worse, I was 3,000 miles away and someone left a sticky note on my hotel door that said, “Neal, your dad‘s dead, call home!” My whole life changed that day. In fact, his death affected just more than my life. It changed the lives of my mother, brother and sisters, and impacted the lives of my children as well.
You see, my father didn’t “believe” in life insurance and my parents probably never earned more than $60,000 a year combined. Yet they raised and educated six kids. They never really planned beyond vacations and the $5 per week savings into the Christmas club account Mom set up where she worked at Motorola.
When Dad died, my mother did not get the choice to continue to work because she wanted to. Rather, she had to continue to work because she needed the money to survive. My little brother was still at home, in school, working part-time and getting ready to go to Arizona State University.
For whatever reason, Mom asked me to help settle Dad’s estate and help her organize the paperwork. Honestly, I had no idea what was what and the concept of a budget was so far beyond me, that she probably asked me more for moral support than for any real assistance.
Mom and Dad had simple wills and nothing else. Today, after 25 years in the financial planning profession I look back and wonder just how my parents managed to remain solvent. Additionally, I realize just how much better off they would have been, WE would have been, had they the benefit of a CERTIFIED FINANCIAL PLANNER™ professional working with them.
As their financial planner, I would have reviewed their insurance portfolio. I would have made certain they had adequate property and casualty insurance, liability protection and life insurance. I would have organized their finances and arranged a meeting with an attorney to ensure they had all of the necessary legal documents in place. Back then, the rules were simpler. Today, adequate legal documents include advanced directives such as; medical powers of attorney, living wills and mental health care powers.
Looking back, I can imagine a far different past, present and future if my parents had the benefits of a CFP®
professional. My mother could have chosen to retire or work out of desire and not of necessity. My little brother would not have had to work while in school or more importantly, not feel as though he had to stay close to home to make sure Mom would be okay. We all helped, but he was the one at home. My mother might have enjoyed better health and lived longer, had she not faced the stress of having to work to survive. I would also guess that, with enough money, Mom would have had the wherewithal to help her six kids, all of whom had some financial struggles over the last 35 years. She could have done this without sacrificing her own financial security. Additionally, she would have provided even more assistance to her grandchildren.
I am sure that my experience is not significantly different than others who have lost a parent at a young age. They, like me, are busy dealing with their own life situations at the time of loss. It may be their marriage, the kids, school, work or health concerns. For me, this experience took its toll. I remember a day after Mom had finally retired, her memory beginning to fail. I looked at her suddenly realizing she was getting old and I had missed my chance to get to know my mother as a friend, as someone with tremendous life experiences instead of “just mom.”
My mother would say; “It ain’t no sin to get old, but it is damn unhandy.” She was right. It is also damn unhandy when we fail to plan, to envision how life events can impact our loved ones today and our future generations.
For me, I remember struggling to find purpose and meaning – to find work that I could really feel good about. I wanted to make a difference. I wanted to matter, and I wanted to serve and help others live better lives. A few years after my father’s death and Mom’s modest finances were in order, I discovered personal financial planning. I knew that this would be my new calling. I knew that if I was a CERTIFIED FINANCIAL PLANNER™ professional that I could help all the moms and dads like mine create a different future, one that could improve not just their lives but that of their children and grandchildren. I knew that people who plan and tend to their own financial lives beyond the day to day were better off than those who chose not to plan.
Let’s make a plan. I cannot think of a better gift you can give yourselves and your loved ones than that of a better future.
From CFP Board Ambassador JT Hatfield Smith, CFP®
Financial Planning for Couples Who Are Not Married
Financial planners are seeing a greater trend in couples cohabitating without the ‘marriage’ wrapper. Whether it be the younger generation living together to give their relationship a ‘test run’, members of the Gay or Lesbian community who are not privy to the protections of marriage by the federal government or a Baby Boomer who has lost a spouse and chooses not to remarry but live with a companion; the need for advanced financial planning for these population segments is increasingly more important.
Under federal law, marriage provides several automatic rights, protections and privileges. However, the federal government defines marriage as a legal union between a man and a woman. This means that ‘partners’, ‘lovers’ or even individuals in states now permitting same-sex marriage can be treated as nothing more than ‘legal strangers.’ Special steps need to be taken to ensure that the wishes of a non-married couple are honored and the partners are protected.
There are more than 1,100 differences between a married couple whom the federal government recognizes as married and those couples not so recognized. The list below, while not at all inclusive, highlights the most important considerations often missed in planning for these Americans:
FINANCIAL POWER OF ATTORNEY (POA)
Valid in all states, these documents give one or more persons the power to act on another’s behalf. The power may be limited to a particular activity or general in its application. The POA may take effect immediately or upon the occurrence of a future event, most commonly a disability. Without this document, family members typically take precedence if someone needs to step in. However, the goals of the family member are not necessarily in-tune with that of the partner.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE
In the event of a medical emergency, a durable power of attorney for health care stipulates who has hospital access and visitation rights, and designates an ‘agent’ to make medical decisions on the individual’s behalf. The law in many jurisdictions does not recognize unmarried couples as family; accordingly, a durable power of attorney for health care is vital for something as simple as permitting entry to the hospital room to comfort a partner or for something as important as getting medical information and assisting in the decision making process.
DOMESTIC PARTNERSHIP AGREEMENT
A domestic partnership agreement (DP agreement) is a legally enforceable contract between two unmarried people. The DP agreement sets forth the rights and obligations of each partner with regard to the property each partner brings to or acquires during the relationship. The DP agreement is similar to a prenuptial agreement for married couples and helps to lay out the process for handling assets should one of the partners decide to leave the relationship, or predecease the other.
A revocable trust, also called a “living trust,” can be an additional tool for unmarried couples when doing incapacity or estate planning. While there is not necessarily a tax benefit to using this vehicle, a significant benefit of the revocable trust is that assets held ‘in trust’ do not get ‘held up’ should an individual become incapacitated or die. The individual, or grantor, creating and funding the trust has total access to the assets during his or her lifetime and can name a successor to take over should they not be able to make decisions on their own. Since there is typically a lot of emotion involved in the event of incapacity or death, this vehicle helps to eliminate the possibility that the grantor’s wishes are not respected in the estate settlement process.
Assets are typically considered “mine,” “yours” and “ours.” It is important to understand the difference between titling options as unexpected gift or estate taxes could be incurred if not done properly. Also be aware of potential creditor issues that could compromise one partner’s assets due to unforeseen circumstances brought on by the other partner. Be aware of the rights and limitations of any form of titling, and where necessary seek advice on the best form of titling for a given set of circumstances and intentions.
REAL ESTATE OWNERSHIP
It is important to ascertain who holds the title for a residence as well as who is responsible for the mortgage. If the mortgage is held in one partner’s name and each partner pays half of the monthly mortgage payment, only the partner on the mortgage may deduct mortgage interest and may be limited to half of the mortgage interest deduction. Aside from the potential tax benefit, putting both partners’ names on the mortgage may be desirable so that a surviving partner does not have to obtain a new mortgage at possibly higher rates. Furthermore, if the partner who owns the property passes away, ensure that proper steps are taken to prevent family members from turning the remaining partner out of the home against the deceased’s wishes. A financial advisor or tax professional should be consulted when making any changes to real estate to ensure that an unanticipated taxable ‘gift’ has not been made.
Financial planning for committed couples not recognized by the federal government as ‘married’ creates significant planning challenges. Couples should work with a CFP®
professional to ensure that they have the appropriate protections in place. Items that might appear to be insignificant today may have adverse effects later, such as inadvertent taxes, loss of control in the event of incapacity, or negative consequences for a surviving partner.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
The CFP Board Wants You to Be Protected
A recent survey by the Certified Financial Planner Board of Standards found that 60 percent of CERTIFIED FINANCIAL PLANNER™ professionals know at least one consumer who has been defrauded or abused by an adviser. Most of these victims of fraud or abuse were between the ages of 61 and 75, the survey found. To help combat this problem, the CFP Board has released a booklet that can help consumers identify when a financial adviser is engaging in fraud or unethical behavior. For instance, the booklet--which is entitled the "Consumer Guide to Financial Self-Defense"--warns consumers to be wary of advisers who offer to fill out applications for insurance, investor profiles, and other types of forms for them. Consumers who allow their adviser to do this could be giving them the chance to falsify information on the form, the booklet warns. The booklet goes on to advise consumers never to leave blanks in paperwork and to ask advisers to give them copies of all completed documents. Consumers are also warned in the booklet to never make out a check to the adviser or leave the payee line blank, since doing so could allow the adviser to steal their money. Finally, consumers should be cautious when advisers use high-pressure sales tactics, since they may simply be trying to meet a quota or earn a bonus and may not be acting in the consumer's best interest. Consumers should be sure to carefully consider any investment product their adviser tries to sell them, and they should understand how their adviser earns his or her pay.
A CERTIFIED FINANCIAL PLANNER™ Professional Can Help You Get Out of Debt
There are several reasons why a consumer may require the services of a CERTIFIED FINANCIAL PLANNER™ professional, according to Roger Wohlner, CFP®
. Parents with minor children who lack written provisions for the children's care need to ensure their well-being in the event of the parents' death. CERTIFIED FINANCIAL PLANNER™ professionals are also appropriate for consumers who make their 401(k) choices based on plan choices from the previous quarter, because most consumers need a long-term strategy that takes into consideration their financial targets and external holdings; a CERTIFIED FINANCIAL PLANNER™ professional can give them some perspective. Many people fail to set clear financial goals for such things as retirement or paying for their children's college education. These goals are ineffective unless they are quantified and accompanied by a time frame that enables progress to be tracked. Other consumers may have investment portfolios that are merely a disorganized collection of accounts and holdings. It is important for these individuals to form a cohesive financial plan or investment strategy, especially because they may change jobs multiple times during a career. Finally, many consumers are too busy with their careers and families to pay enough attention to their financial planning and investment needs, and would benefit from obtaining an independent view of their situation.
Financial Planning for Your Retirement
A Retirement Calculator Can Help You Plan for Retirement
Although it is important for investors to determine how much money they will need in retirement, many have not done so. The Employee Benefit Resource Institute's 2011 Retirement Confidence Survey found that just 42 percent of Americans have calculated how much money they will need to support themselves after they stop working. Jill Schlesinger, CFP®
says all investors need to do to figure out how much money they will need in retirement is to plug some information into one of the many retirement calculators that are available online. Retirement calculators tend to ask for an expected inflation rate and rate of investment return. Schlesinger notes that investors should assume a 4.5 percent inflation rate and a rate of return in the 4 percent to 5 percent range. Investors should take their tolerance for risk into account when trying to determine the rate of return on their investments, Schlesinger says. As for life expectancy, Schlesinger says, individuals who are older than 50 should expect to live until age 90 while those who are under 50 should plan to live until age 95. Next, investors should determine what their expenses will be in retirement. Schlesinger says this can be done by taking current expenses and subtracting those that will end in retirement, such as commuting expenses, tuition, and child care. Finally, investors need to enter how much money they have already saved, how much money they are contributing to their retirement accounts on an annual basis, and how much money they expect to receive from pensions and Social Security.
You May Want to Consider Delaying Your Retirement
About 39 percent of workers plan to delay retirement, and the majority expect to work another three years, according to a survey earlier in the year from Towers Watson, the human resources consulting firm. Baby boomers who are 55 or older will not reach their full retirement age for Social Security benefits until age 66 1/2 or 67, so retiring at 68 or even 70 may not seem like much of a stretch. "Sixty-eight is definitely the new 65!" according to Stacy Francis, CFP®
. "Delaying retirement leaves a worker with fewer years of retirement to finance, more time to save and earn returns, and higher Social Security benefits if they delay taking them." Baby Boomers who are facing retirement without enough money should be as disciplined as possible in their retirement savings strategy, especially in their 50s, according to financial experts. Workers 50 or older can make extra "catch-up contributions" to IRAs, 401(k)s, and other defined contribution plans. However, some studies suggest that catch-up contributions may not be as beneficial for people who have reached 60.
Think About Maximizing Your Social Security Benefits
Often people apply for Social Security benefits too early out of the misconception that all of the benefits one has earned over the years will not be received if future benefits are reduced. For anyone over the age of 60 today there should be no concern that benefits will disappear, writes Gary Brooks, CFP®
; taking benefits early amounts to voluntarily accepting reduced benefits. Indeed, about 74 percent of current retirees are receiving a reduced benefit according to the Social Security Administration. The Financial Security Project from Boston College’s Center for Retirement Research found that people who wait until age 70 to claim Social Security receive up to 76 percent more annual income than those who wait until 62. It is not always possible to wait until age 70 for health or financial reasons, but for those who can, there is a great reward. Social Security income has a cost of living adjustment, and the inflation adjustment will be applied to the larger base benefit that comes from waiting. At around age 82 there is a break-even point where the total retirement income received is larger than it would be by taking smaller checks over a longer period. And for couples, this can help a surviving spouse to be more financially secure.
Financial Planning for Your Life Now
Use These Smart Strategies to Reduce Your Tax Bill
Wes Moss, CFP®
shares several investment strategies to help mitigate financial liability. Investors should wipe out capital gains, since, for instance, a $5,000 gain on one investment and a $6,000 loss on another will leave the investor with no gain and an additional $1,000 to offset capital gains in later years. If the investor sold a rental property that he or she managed at a loss, that loss may be counted as an income deduction. Investors concerned about an increase in the capital gains tax rate should consider selling some of their appreciated stocks or mutual funds, paying the tax at today's favorable capital gains rate, and then using the leftover proceeds to buy back the stock, or make another similar investment. By donating appreciated stock to a pet charity, the investor can deduct the fair market value of the stock and avoid paying tax on the appreciation.
Carefully Plan What You Will Do With Your Sudden Windfall
Most Americans who become suddenly wealthy through an inheritance or by other means need to be careful their wealth doesn't vanish as quickly as it appeared, financial experts say. Experts say solid planning is the key to maximizing the windfall and ensuring that it lasts, with assistance from a CERTIFIED FINANCIAL PLANNER™ professional, a lawyer, and an accountant. People often make an extravagant purchase or a poor investment in the first months after a windfall, so financial advisers say they should not act too quickly. "It's an extremely emotional time, so it's really important that you take a break to let it all sink in," says Judy Haselton, CFP®
. "Take the time to make a list of goals that outline what you'd like to achieve with your wealth." Experts encourage the suddenly wealthy to realistically access how long the windfall will last, and to watch out for "can't miss" investment pitches and requests to help out family members and friends. The suddenly wealthy should plan their estate, addressing issues such as their tax bill and will, and then focus on their investment strategy to minimize risks and achieve a reasonable growth rate. After mapping out a financial plan, which could include giving to charity, the suddenly wealthy can focus on making purchases they have always dreamed about.
Financial Planning for Your Children
Spending Time on the Financial Aid Process Is Time Well Spent
It can take a lot of time to closely examine financial aid documents for college tuition, but it is time well spent, says Ryan Williamson, CFP®
. “If you spend 15 hours and save $15,000, that’s $1,000 an hour,” he says. Williamson notes that the cost of tuition has risen by 400 percent while aid has increased only 82 percent, and more often parents and students are thinking about what kind of school they can afford. The first thing parents should do is figure out their Expected Family Contribution, which is part of filling out the FAFSA form. Many parents do not fill out the form at all because they find it daunting, Williamson says, but it is important because it could bring them thousands of dollars. Indeed, more than $178 billion was given to undergraduates in the 2010-11 school year, including an average of $6,500 per student in grants, not loans. There are a few online tools that can help parents, including the Net Price Calculator that provides customized estimates of college costs and a FAFSA forecaster that tells parents how much aid they are eligible to receive.
A 529 Plan May Be a Better Option for Your Children Than a Life Insurance Policy
There are differing opinions on the subject of buying life insurance for a child, with many saying it is a waste of money because the purpose of insurance is to replace income and no income is lost if a child dies. Insuring the parent should be the top priority, as that would cause the greatest economic loss, many say. But advocates say permanent life insurance policies are less expensive than term policies and they build up cash value that can be borrowed and can protect a child’s future insurability. Still, some experts say there are better ways to save money, particularly for college tuition. Larry Ginsburg, CFP®
says a better college saving tool is the 529 qualified tuition plan, which is sponsored by states or educational institutions and comes in two varieties: pre-paid tuition or college savings plans. The 529 relies on the performance of investments for its returns, while permanent life policies are guaranteed and grow with predictable returns. Advocates of permanent life policies point out, though, that while the return on a permanent policy may be low, given today’s economic climate, a guaranteed 3 percent to 5 percent return over 20 years looks very attractive. It is a good tool for slow-but-steady safe returns with little to no risk, some say, and some parents or grandparents buy the policies to help their children once they reach adulthood--the policy can be surrendered for cash value or borrowed against while preserving the death benefit. But experts note that it is important to work with a professional financial adviser because the products need to be designed carefully for a family’s needs.
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