|
* RULE NO. 2: We're Living Longer, So You'll Need More Money When You
Retire. People are living beyond 80 and 90, and chances are, you'll be one of
them. Living longer means dealing with an increasing cost of living after you
stop working. This means that your retirement planning must ensure that you
don't run out of money in your golden years.
* RULE NO. 3: Don't Count On Social Security. With all the talk about
privatizing Social Security, it's almost certain that there will be some
changes to the system before you are ready to retire. Whatever you receive
from Social Security will most likely not be enough to pay your expenses.
Your retirement planning must ensure that you are not dependent on it for
survival.
* RULE NO. 4: Manage Your Retirement Like You Manage Your Career. Without
a career, where would you be? Without retirement savings, where will you be
20 or 30 years from now? Just as you must invest in your career and make the
right moves daily to keep it on track, you must do the same with your
retirement planning.
FINANCES IN YOUR 20s:
* Welcome to budget living 101. Priority No. 1 is creating a budget. "You
need a budget to set parameters on spending," says Wright. It's likely you
will be holding down your first full-time job, and a budget will help you
adjust to having a regular income.
* Think "save," not "spend." A budget will also help you set aside some money
to save and limit your credit card use. Build an emergency fund of at least
three to six months worth of living expenses.
* Pay down debt. Accelerating debt reduction is a must. As interest rates
continue to rise, consider consolidating student loans. There is also a
congressional proposal to change the consolidation program from a fixed
interest rate to a variable interest rate as of July 1, 2006.
* Join your employer's savings plan. A big part of getting ready for
retirement is participating in your company's retirement plan. Join as soon
as you are eligible. If your employer matches employee contributions up to a
certain percent, take advantage of that by contributing at least that
percentage of your own earnings. And if you're thinking about changing jobs,
timing is critical. You might want to think twice about leaving your job
before you are fully vested, or in other words, until you have been at your
job long enough to take all of your retirement plan earnings with you when
you go. A situation may arise where you have to leave a company before you're
vested--having to relocate because of a spouse's promotion, for example--but
otherwise, try not to leave money on the table.
* Be choosy with credit. Many people in their 20s are building credit for the
first time, but many are also rebuilding or repairing it. If you are thinking
about applying for a new credit card, choose one with a low, fixed annual
percentage rate. If you already have one, contact the issuer to see if it is
possible to get a lower APR, Wright says. (This may not be done so easily
with store cards.) Another way to manage credit card debt is to pay as much
above the minimum payment as possible, on time, each month. Optimize credit
card payments by paying the card with the highest interest rate first.
* Fix your credit report. The credit report is the grown-up's report card.
Review it for errors and any signs of identity theft. You can get a free one
every year at
www.AnnualCreditReport.com.
Companies now are looking at job applicants' credit reports, especially if
you're in the financial services arena or will be handling money. Also, when
you go to buy your first new car, or even when you fill out an application
for an apartment, your credit report will likely come into play.
* Set realistic goals. Whether you wish to return to school, change your
career goals, or buy a home in a few years, it is important to have realistic
retirement goals because they will influence your savings and investing, says
Wright. All of these life changes will affect your retirement. For example,
if you wanted an income stream of $5,000 per month until age 80, and you
retire at 55, you would have to save more than $11,000 a year, assuming an
average annual rate of return of 10%. * Dump bad habits. Don't be tempted to
spend beyond your means. Getting your first job often coincides with buying a
new wardrobe and can be closely followed by moving into a new apartment. Even
a disciplined person could be tempted to spend, spend, spend. Wright says
consider purchasing prepaid spending cards, say $300 a month, for
miscellaneous items. "Not only will you be forced to stay within that limit,
you can get a printout of your purchases, which will help you track where
your money is going."
When you're in your 20s, you can take more risk because you have the luxury
of time on your side. You can afford to ride out the market's bumps because
you won't be touching that money in the near future. With this in mind,
Wright recommends an investment portfolio comprised completely of stocks: 30%
large-growth, 30% large-value, 5% mid-growth, 10% mid-value, 10% small-value,
and 15% international stocks.
"This is designed for the highest risk tolerance investor with a long time
horizon. Investors with this kind of portfolio will look to achieve the
highest return potential, but should understand that there will be the
possibility for high fluctuations in market values," Wright says.
TAKE LIFE CHANGES INTO CONSIDERATION IF YOU WANT TO RETIRE WELL
FINANCES IN YOUR 30s:
This is a time when people start to get serious about retirement. Their 20s
have flown by and, after some time in the workplace, they are certain of one
thing: They don't want to work the rest of their lives. "One of the first
questions you should ask yourself at this point is what you need to do
differently," says Jocelyn D. Wright, a financial adviser at Wealth
Development Strategies L.P. in Houston. It could be that you need to stop
spending haphazardly or go back to school to put yourself in a position to
get a better job. There could be any number of things you need to do to
change course.
* Do a reality check. Self-assessment is important. Once you enter your 30s,
it's important to have greater clarity about your goals, taking into account
your current income and asset base. You may be married at this point and it
is equally important to make sure you and your spouse don't have competing
goals, says Wright. "Talk openly, before marriage, about your goals, how much
debt each of you have, and how you will manage the money--separately, a joint
account, or a combination of the two?"
* Catch up on saving. When it comes to retirement, it's about catching up. A
career change, marriage, the birth of a child, or other seen and unforeseen
events may occur that may set you back financially. When this happens, set
new spending controls, says Wright. For instance, if you've started your own
business, establish a retirement plan in order to set aside tax-deductible,
tax-deferred monies. Start with an IRA, which has an annual contribution
limit of $4,000. As your business grows, consider other retirement planning
options such as a SEP-IRA or Individual 401(k).
* Establish and maintain an emergency reserve/opportunity fund. While those
who work for a company should strive to have three to six months of living
expenses set aside, the self-employed should shoot for as much as a 12-month
cushion.
* Protect your assets. Without proper protection, you can forget about
achieving your retirement dreams. Life insurance is necessary for a growing
family. Increase yours as needed to meet liquidity needs in the event of a
premature death. You may want to consider converting a portion of your term
insurance to a permanent cash value policy for long-term estate planning
purposes, says Wright. Maintaining adequate disability income insurance is
important as well. Particular attention should be paid to the elimination
period, benefit period, and the policy's definition of disability. You must
also maintain the appropriate amount and type of liability insurance. This is
especially important for business owners and individuals with rental
property. "Consult with an attorney to make sure that any existing and future
investment property is structured properly to minimize taxes and/or liability
exposure. For example, if something were to happen to Dennis, would Century
21 buy back his franchise? And if so, how would the franchise be valued?"
says Wright.
* Learn from your parents. Many in this age group have parents who are
retiring. They are seeing how prepared or unprepared they are for it. It's a
wake-up call. Many realize that their parents will need their financial
support or that their parents may have to go back to work. The best case
scenario is that your parents have prepared well for retirement.
Unfortunately, that's not always true. Start preparing yourself now.
* Be savvy about your next moves. You may have already experienced a layoff
or changed careers. When you're in transition, staying on track is key, says
Wright. *'Roll over retirement funds and consolidate various accounts so you
will have greater control over your money. You can't expect your old employer
to look out for you, updating you on changes in the retirement plan," Wright
points out. And don't dismiss vesting schedules. If waiting six months to
leave a job will mean being 100% vested, consider staying and walk away with
more money. Don't let entrepreneurial aspirations get in the way of common
sense.
* Have a family spending plan. Be careful of overspending, especially on the
children. And don't put saving for your child's college education before
saving for your own retirement. "Just like when you're on an airplane and
they tell you to put on your oxygen mask first and then help your child, it's
the same with retirement," says Wright. "You want to provide for them, but
not to the detriment of your own retirement. You can get a loan for a child's
education, but you can't get a loan for your retirement." With private school
education costs in the stratosphere, many parents will have tough choices to
make. Do you fund expensive schooling now or put that money toward the
college fund? "You may not be able to do everything. Figure out your
priorities," advises Wright.
A portfolio for investors in their 30s should be moderately aggressive,
seeking above-average growth with a long investment time horizon. This
portfolio will typically hold 80% equities and 20% fixed income securities.
This portfolio can experience volatility and, "the investor should be
patient, able to withstand unexpected changes in market value," says Wright.
In other words, you may need to put your seatbelt on for what could be a
bumpy road. Hopefully though, in the long run, the ride will be well worth
it, as you reap the rewards of growth.
Ideally, a 10% to 20% allocation in investment real estate would also be
appropriate for someone at this age. "The goal is to have a properly
diversified portfolio," says Wright.
Finding Your Way at 40
MAKING FINANCIAL ADJUSTMENTS DURING THIS DECADE IS THE KEY TO JUGGLING
PERSONAL GOALS AND LIFE CIRCUMSTANCES
FINANCES IN YOUR 40s
The 40s can be a time of financial urgency for many. People may be dealing
with lingering debt, taking care of aging parents, putting children through
college, and worrying about meeting individual financial goals. To help the
High family and others like them navigate through this critical time before
retirement, Pierre Dunagan, president of The Dunagan Group in Chicago, offers
these suggestions:
* Eliminate debt. "Keep an eye on debt in your 40s," cautions Dunagan, who
advocates taking aggressive action. "Debt can be crippling at a time when you
should be really focusing on your future."
* Build an emergency fund. Typically, you'll need three to six months of
salary to handle possible mishaps.
* Maximize employer savings plans. Employer-sponsored pre-tax savings
vehicles offer great opportunities to save for retirement.
* Reassess priorities. Personal and family goals may need to be adjusted to
make room for saving for retirement and other important concerns.
* Re-evaluate your retirement plan. You may have $100,000 to $200,000 or so
saved for retirement by now, so it's important to track investments more
closely. "See how your assets are allocated and whether it's time to make
course corrections and adjustments," says Dunagan, "particularly if you
haven't touched your portfolio in a while."
* Adjust life insurance coverage. Higher insurance levels may he needed to
take care of the mortgage, the children's college education, and other living
expenses.
* Open additional tax-sheltered investments. Saving outside your
employer-sponsored retirement plan is always smart.
* Keep spending under control. As you become a higher wage earner, you become
more vulnerable to layoffs. You also have to guard against illness more often
as you get older. "You don't want to overextend yourself, assuming you will
always be able to keep up your current lifestyle," says Dunagan. "You need to
leave yourself breathing room, so if you or your spouse lose a job or get
sick, you will better be able to handle the change."
* Don't refinance unless necessary. A lot of professionals run up $30,000 to
$40,000 in credit card debt then refinance their mortgage to pay it off
because the real estate market has been strong. However, they run the risk of
running up their credit cards again. "They don't get that they are living
above their means," says Dunagan. "You have to be careful of re-stripping the
equity out of your house. At some point you stop refinancing and pay off the
mortgage."
* Prepare for the possibility of divorce. "Divorce can be financially
devastating," says Dunagan. "Design a plan to regroup, to get back on track,
and be prepared to make adjustments, whether it's moving to a smaller place
or whatever you need to do. Don't get depressed, take action."
While typically you might expect an allocation of 65% stocks and 35% fixed
income for the forty something crowd, if you are on track with your
retirement goals and also have savings in cash, Dunagan likes to be a little
more aggressive. "You want to take your foot off the accelerator a little
bit, but you still need growth," he says.
Of course, since everyone will have different life situations by the time
they reach their 40s, there are plenty of different configurations that a
sample portfolio could take. One possibility might look like this: 25%
large-cap. 20% mid-cap, 15% small-cap, and 5% international stocks; plus 20%
government bonds, 10% corporate bonds, and 5% cash.
The Fabulous 50s
SHORING UP THE FOUNDATION FOR YOUR RETIREMENT WILL PAY OFF LATER
FINANCES IN YOUR 50s
It's crunch time for just about everyone at this age. To help, Pierre Dunagan,
president of The Dunagan Group in Chicago, suggests the following plan:
* Firm up retirement options. This is the decade to think realistically about
your retirement. "Decide what kind of lifestyle you want and plan
accordingly," says Dunagan. For example, if you will be dividing your time
between two homes, you need to earmark savings for travel expenses.
* Continue saving for retirement. With people living longer, everyone must
continue to invest for their retirement.
* Calculate the right portfolio risk. Don't be too conservative, "because you
could still have a lot of life to live and inflation would eat away at your
principal," says Dunagan. But don't be overly aggressive because a lot of
people had to go back to work because of their losses in the stock market.
Staying on top of your portfolio at this time of your life is not a luxury
but a necessity. "You must be diligent about visiting your financial planner
once or twice a year. You really have to track your assets the closer you get
to retirement," says Dunagan.
* Build an emergency fund.
* Consider investments outside of the market. This will give your portfolio
diversity.
* Take care of aging parents. Deal with end-of-life issues, like where your
parents want to live and how. Do they have a will? Are they covered for
long-term illnesses? Find out how you fit into their future and what may be
required of you emotionally and financially. Advance knowledge will help you
prepare on both fronts.
* Downsize housing costs. Consider selling your home for a smaller one or a
condo. You can invest the proceeds toward retirement. A house can be a
tremendous financial and physical responsibility.
* Stop giving to relatives/children. "Find a way to wean them off you,
because you may reach a point where you can no longer afford to lend a
helping hand," says Dunagan.
* Explore long-term care insurance. If it makes sense, purchasing it in your
50s is a lot cheaper than at 70.
* Adjust life insurance. If husband and wife are both working, make sure each
has adequate life insurance for what they would be responsible for during
those earning years, says Dunagan.
"The closer you get to retirement, the more you need to dial back risk," says
Dunagan. A 50-50 split of stocks and fixed income investments while you're in
your 50s allows your retirement savings some room to grow while giving you a
safety net of sorts. With the time approaching that you will need to draw on
that money, having some measure of safety becomes an imperative for many
people.
"However, if you are behind in your savings, you may need to continue to be
more aggressive as an investor to make up for lost time," he adds.
When you're determining your asset allocation, consider all of your
income--from Social Security, pensions, and elsewhere--to help determine how
much risk is appropriate for you at this stage of your life. A possible
portfolio mix might look like this: 20% large-cap, 20% mid-cap, and 10%
small-cap stocks, plus 30% government bonds, 15% corporate bond funds, and 5%
cash.
Early Out
PLANNING FOR AN EARLY RETIREMENT TAKES FORESIGHT AND COMMITMENT, BUT IF DONE
RIGHT THE REWARDS ARE SWEET
FINANCES IN YOUR 60s
Most people in their 60s are making the transition from planning for
retirement to living in retirement. To make sure you're on track, here's some
advice from Don Roman, a senior financial planner with MetLife Securities in
Atlanta:
FIND BALANCE IN YOUR PORTFOLIO
Seek investments that will provide income, such as corporate bonds,
guaranteed investment contracts (GICs), and annuities. To learn more about
these investment vehicles, visit the National Association of Investors
Corporation at
www.betterinvest ing.org. Also, if you haven't already done
so, get a financial planner who can tell you when you must take withdrawals
and how to best manage your money.
And, make sure your retirement savings aren't sitting in one investment
vehicle.
PROTECT YOURSELF FOR THE LONG TERM
Statistics show people are living longer. The closer you get to retirement,
the more likely you will need additional insurance coverage. With that in
mind, remember to:
* Review your medical coverage. Consider purchasing supplemental medical
coverage to protect against gaps such as increased deductibles, higher
out-of-pocket costs, and elimination of coverage.
* Purchase long-term care insurance policies. Compare the costs of long-term
care insurance premiums versus the possibility of depleting assets to pay for
such care. If you're retired, you can use the premiums previously reserved
for disability insurance to cover long-term care insurance premiums. Ensure
that policies cover the range of potential living arrangements, such as
in-home healthcare, assisted living facilities, and nursing homes.
* Review your life insurance. Roman recommends two types of policies:
universal life with secondary guarantees (ULSG) and guaranteed advantage
universal life (GAUL). The coverage for the ULSG is guaranteed to last until
the insured dies. Also, the premium is guaranteed to remain the same for the
lifetime of the insured. The GAUL policy has a rider--the guaranteed survivor
income benefit (GSIB)--that pays a fixed monthly income for the life of the
beneficiary (versus the more traditional lump sum benefit). Visit
www.unitedseniorsheaith.org and
www.ahca.org to learn more.
ESTABLISH A CONTINGENCY PLAN
Only one in five retirees or pre-retirees has a written plan for managing
income, expenses, and assets during retirement, says Roman. Since many
retirees live on a fixed income, it's also important to create a budget to
help decrease discretionary spending. Any resulting savings should go into a
diversified investment account, says Roman. Those dependent on one income
should also think about what life would be like if a spouse were to die. If
you or your spouse will receive it, factor in your annual Social Security
benefit statement to determine the amount of any future retirement benefit.
For budget and savings tips, go to the American Institute of Certified Public
Accountants site, www.360financialliteracy.org.
DEVELOP AN ESTATE PLAN
As you reach your twilight years, meeting with a qualified attorney to
develop an estate plan is a priority. First on the list is updating your
wills to ensure they reflect your current wishes.
Second, durable powers of attorney and healthcare proxies should be prepared
to provide instructions for how you want your affairs and healthcare
treatment handled in the event of your physical or mental incapacity.
Third, determine your interest in legacy planning for your children and
future generations. A site that may be useful in sorting out estate planning
issues is
www.nafep.com, sponsored by the National Association of Financial
and Estate Planning.
As you approach and perhaps enter retirement, you will need to change your
asset allocation to reduce your portfolio's volatility and overall market
exposure, says Roman.
Keep in mind that asset allocations will vary based on how much retirement
savings you've accumulated and your specific life circumstances. There is no
one model that is right for everyone. If you're in your early 60s, you might
choose to stay somewhat aggressive with a 40% stocks, 60% fixed income mix.
But, for many people, depending on their circumstances and risk tolerance,
20% stocks and 80% fixed income may be more suitable.
Typically at this age you'll want to have a more balanced portfolio overall.
A possible mix might include: 20% investment-grade treasuries, 20% corporate
high dividend bonds, and 10% corporate high-yield bonds, plus 10% large-cap
growth, 12% large-cap value, 3% mid-cap growth, 5% mid-cap value, 3%
small-cap growth, 5% small-cap value, 2% micro-cap, 3% international growth,
3% international value, and 4% real estate stocks.
70 And Secure
AS YOU SHIFT INTO RETIREMENT, CHARTING A COURSE TO PROTECT YOUR ASSETS IS THE
WAY TO GO
FINANCES IN YOUR 70s
The 70s are often about slowing down and smelling the roses. But just as
you're catching your breath, you may begin to worry about outliving your
assets. As you shift course into retirement, Don Roman, a senior financial
planner with MetLife Securities in Atlanta, offers some direction:
CURB YOUR HEALTHCARE COSTS
The biggest threat to many retirement portfolios is medical costs. If you
don't have private medical insurance, you'll need to seek out Medicare. Log
on to www.medicare.gov to find out about plan costs and long-term care
options. To cut costs, consider alternatives like buying prescription drugs
through mail order. You should also have a stash of money just to pay for
medical extras and prescriptions, as those costs are likely to increase, says
Roman.
According to the National Academy of Eider Law Attorneys, the average annual
cost of nursing home care in the U.S. is more than $56,000, with 36% of that
paid out of pocket by individuals and their families. If somehow you hadn't
gotten around to getting long-term care insurance until your 70s, prepare
yourself for sticker shock. When reviewing policies, pay particular attention
to inflation protection, the waiting period, coverage, and the period of
coverage to ensure that you have proper insurance for your needs. Then look
for added bonuses. Some policies even allow supportive services to be
provided by a spouse or other relatives. "You want to be clear on what your
policy offers and doesn't," says Roman. For more information, check out
www.life-line.org, sponsored by the Life and Health Insurance Foundation for
Education.
TAP INVESTMENTS WISELY
At age 70, Uncle Sam requires you to start withdrawing from qualified plans.
Minimum distribution requirements can be complicated. Go to the Older
Americans' Tax Guide at www.irs.gov for help sorting it out.
You may need to look for ways to shelter that taxable income. "This is where
legacy planning comes in," Roman says. "If you haven't already thought about
your mortality, it should become a focal point for you to talk about what you
would like to do for your dependents, your loved ones, your grandchildren, as
well as your church or charity." Funds not needed for living expenses could
be redirected to a life insurance policy, he says.
MANAGE YOUR MONEY
While one's needs are highly individual, the assumption is that as you age,
you will need more income, says Roman. So you will need a portfolio heavily
weighted in bonds and income-generating vehicles. However, keep your options
open.
Consider dividend-paying stocks that will also give you some potential for
growth, says Roman. There are a whole slew of bonds, such as tax free
municipal bonds, corporate bonds, and treasuries to consider as well. Fixed
income options would include guaranteed investments contracts and annuities.
As you decide, Roman cautions: "Be conservative, you don't want to deplete
your assets before your death. Even at 70 you could have a lot of living to
do. You could exceed your life expectancy."
ORGANIZE YOUR DOCUMENTS
At this point in your life, there's no time to procrastinate. You need to
take care of your business now. It's time to meet with an attorney to prepare
an updated will, durable powers of attorney, healthcare proxy, and living
will. All of those documents will serve you well when you need them.
A good place to study up on these issues is the wills and estate planning
section of www.nolo.com. Also, make sure to tell someone you trust, such as
your lawyer and a family friend, where the documents are to avoid confusion.
Take this time to review your financial situation so you can set sail on your
new life with ease.
The assumption is that you will need more income as you age, so you will need
a portfolio heavily weighted in bonds and income-generating vehicles. The
person who might want 100% in fixed assets is likely someone who needs income
to meet living expenses now.
Realize, however, that you have more options than just bonds, says Roman.
Consider dividend paying stocks that will also give you some potential for
growth. Or you could reallocate your portfolio entirely and invest in an
annuity, says Roman. Guaranteed investment contracts (GICs) are fixed assets
with no appreciation potential but which provide income.
While you want to get more conservative in your 7Os, remember, says Roman,
"You could have another 10 to 20 years or more, so you might need some
growth, too." If growth is your main goal, then you're going to be served
well by a portfolio with up to 60% equities.
Copyright 2005 www-socialsecuritydisabilityinfo.com
This site is used for information purposes only. Click below for details of
our policies.
Privacy Policy |
Contact Us
| Disclaimer |
