Financial Planning Services
What is Retirement Planning?
One of the most significant financial transitions in a person’s life is the decision to retire. While it is predicted that many baby boomers will continue to work at some type of job because they want to or have to, retirement still requires a substantial nest egg.
How much will you need to retire? It depends. Some people can live happily on half of their pre-retirement income while others require 100 percent—or more. For many people, 70 percent to 80 percent of the amount earned prior to retirement is a realistic income replacement percentage. When it comes to retirement planning, there are no “one size fits all” solutions. A lot depends on your goals (for example, traveling and pursuing hobbies), and lifestyle decisions (where you choose to live, if you choose to work, etc.), as well as available resources such as an employer-provided pension and retiree health benefits. Other important factors to consider are health status, inflation, and family responsibilities (such as caring for aging parents).
A 65-year-old who is retiring today will live 16 to 19 years in retirement, on average. Many people retiring in their 50s and early 60s will spend a third of their life retired. Expenses during the early active phase can equal or exceed those during the years before. Expenses often decrease in the passive phase but may increase during the final phase due to medical and/or long-term care costs.
The best way to make an accurate estimate of how much you’ll need is to track your current living expenses for several months. Then, identify those expenses that will end or decrease in retirement (for example, commuting costs, union dues, and mortgage payments) and those that are likely to begin or increase (for example, travel and entertainment, medical and dental, and health insurance premiums). Keep in mind that inflation will increase expenses over time. Therefore, a reasonable annual inflation rate should be factored into retirement savings calculations.
Information courtesy of The Financial Planning Association.
Taking Care of Aging Parents and Planning for the Impact of Age.
Caregiving and planning for the future needs of aging parents are often difficult and sensitive tasks for adult children, who must balance the needs of their own families with concerns about their parents’ well-being. Not surprisingly, many people wait for a crisis to occur before they begin to take action. Yet, Americans are living longer than ever before and the odds are high that families will need to make decisions regarding long-term care for an aging parent at some point in time. Males and females who were 85 in the year 2000 can expect to live another six and seven years, respectively. Today, changes in health and independence normally happen even later in life.
Despite the facts, aging parents and their children often avoid talking about long-term care for a number of reasons. Avoidance factors include not knowing how to begin the conversation, denial of their own and others’ mortality, and fear of how their motives will be interpreted (as in “he/she is after my money”). Other reasons are parents’ privacy about their income and assets, a feeling that it is too early to plan because everything is fine, and/or the potential for family conflict.
Information courtesy of The Financial Planning Association.
How do we Plan for College Expenses?
After a house and car purchase, a child’s college education is one of the largest expenses many families face. For several decades, college tuition and fees have been increasing faster than the general rate of inflation. Total college expenses increased 5.6 percent during the 2004-2005 academic year for an average cost of $11,354 at public colleges and $27,516 at private colleges. Despite the high cost, an investment in a college education generally is worth it because average college graduates earn about 75 percent more than high school graduates over a working lifetime. Those with graduate and professional degrees earn even more. According to the College Board and the U.S. Census Bureau, the earnings of college graduates and those with advanced degrees may exceed those of high school graduates by as much as $1 million and $2 million, respectively. In other words, people who learn more usually earn more.
Many decisions are associated with college planning, including how much to save, where to save, and how to balance the competing demands on household income for both college and retirement savings. After doing the math, some parents may plan to save a fixed amount ($30,000, for example) to cover part of the cost of college or trade school and require their children to cover the balance with scholarships, part-time earnings, and/or loans. Not only does this arrangement reduce the financial pressure on parents, but having children contribute to the cost of their education may help them value it more and take seriously the opportunity to attend college.
When parents get a late start saving for college, they may need to explore various catch-up strategies such as home equity loans, mortgage refinancing, and increasing household income for college expenses. They’ll also need to decide where to place their college savings and how much investment risk to take.
Information courtesy of The Financial Planning Association.
Planning for Major Purchases
After a house and, perhaps, a college education for children, a new car is the largest purchase many families make. With the average price of a new vehicle close to $30,000, it pays to take the time to shop around and get a good deal. The most important point to remember, before visiting a car dealer, is that “everything is negotiable.” Many car buyers are not good negotiators, however, and pay more than they have to. An alternative is to ask a friend or famiy member to negotiate for you. Before buying a car, know what you can comfortably afford. Experts recommend that monthly consumer debt, including loan payments on a car, should not exceed 15 percent to 20 percent of net income. You’ll also need money for maintenance, insurance, and operating expenses.
Car buyers must weigh the pros and cons of new cars versus used and buying versus leasing. They must also decide whether to buy from a private seller or a car dealership.
Issues include:
New cars will cost less for repairs, because of their warranties, and can be custom ordered to an owner’s specifications. The downside is depreciation, or loss of value. According to the Automobile Lease Guide, the average car or truck loses 38 percent of its sticker price in the first year alone. After three years, most cars are worth from 30 percent to 60 percent of their original cost, depending on the model. A buyer who obtains a loan with four to seven years of payments is likely to be “upside-down” for a while. This means that their car is worth less than the amount owed on it.
Used cars are less expensive to own because the previous owner(s) absorbed much of the depreciation. They may also need more repairs because of their age and condition.
Car leases have cheaper monthly payments than new car loans and are the primary way luxury cars are financed in the United States today. Their two major disadvantages are the fact that people who lease don’t get to keep their car at the end of the lease term and limits in the lease contract on the number of miles (generally 12,000 to 15,000) that can be driven annually without penalties. Leases generally make the most sense for drivers who buy cars every two to three years (or always have car payments), drive fewer miles than the annual limit, and take good care of cars to avoid “excess wear and tear” charges. They do not make sense for drivers who keep cars seven to 10 years or more.
As for where to buy a car, private sellers often charge less than dealerships but car dealers may offer warranties and repair plans.
Other major purchases that people make include “big ticket” items such as furniture, computers and electronics, and appliances. “Big ticket” means that items cost more than most people can afford from a single paycheck. They can be saved for in advance, like any other short-term financial goal, or purchased with a fixed-rate loan or low-interest rate credit card. Like cars, big ticket items generally depreciate following a purchase and come with the same buying decisions: new or used, leased or financed, and from a private seller or retail merchant.
Information courtesy of The Financial Planning Association.
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