We put out the call, arranging for four volunteers to get a free financial plan and share the details with our readers. The 100 or so folks who applied...
We put out the call, arranging for four volunteers to get a free financial plan and share the details with our readers. The 100 or so folks who applied, though very different, echoed a common theme: “In this uncertain, changing world, we’re not sure what to do.”
A few telling comments: “I’m afraid of a new downturn.”
“I have ignored my financial future in order to meet the demands of daily life.”
“My plan: Develop a taste for cat food.”
Here are the four we picked as representing a good mix of folks needing a makeover. The planners’ advice for them will speak to many more.
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Help picking a planner
Financial Planning Association: Most members of this professional association have earned the certified-financial planner designation, which means they must pass a comprehensive examination and continue to meet the education, experience and ethics standards established by the Certified Financial Planner Board of Standards. Web site includes a link to the Puget Sound chapter. Includes fee-only as well as fee-plus-commission and commission-only planners. 800-322-4237 or www.fpanet.org
The National Association of Personal Financial Advisors: Association of fee-only advisers who make no commissions on products. Members must meet entrance- and continuing-education standards and comply with the group’s code of ethics. 800-366-2732 or www.napfa.com
The Garrett Planning Network: Fee-only advisers who specifically serve middle-income clients, offering consulting on an hourly basis: 866-260-8400 or www.garrettplanningnetwork.com
My Financial Advice: Web site that matches clients with fee-only advisers (including some from Gannett Planning Network) online; advice is provided by e-mail or telephone. Targeted primarily at middle-income clients. Charges typically $2 to $7 per minute, with an average hourly rate of about $150. www.Myfinancialadvice.com
Save early, watch it grow
Retirement planners advise clients to start saving as much as they can as early as possible. Here are three examples showing the difference it makes when you start saving early:
Each example below assumes a 6 percent real (that is, inflation-adjusted) rate of return on savings, then, after retirement, a more conservative 4 percent real rate of return on the savings’ principal.
|A 25-year-old who earns $400 per week|
|What she saves||Savings at age 65||After 65, return on principal pays|
|5%, or $20 / week, for 40 yrs.||$173,000||$825 a month for 30 yrs.|
|10%, or $40 / week, for 40 yrs.||$346,000||$1,650 a month for 30 yrs.|
|A 30-year-old who earns $400 per week|
|What she saves||Savings at age 65||After 65, return on principal pays|
|5%, or $20 / week, for 35 yrs.||$124,000||$590 a month for 30 yrs.|
|10%, or $40 / week, for 35 yrs.||$248,000||$1,180 a month for 30 yrs.|
How much you’ll need at retirement
If you are earning a certain amount per month now, how much will you need at the time you retire to continue to have that much money to spend? The following examples do not include Social Security or pension payouts, since those are variables that are difficult to predict today. The examples include how much money you would need to have in liquid assets (cash, savings and other assets that can be turned into cash quickly — not including your home). These figures assume a 6 percent rate of return.
|Yearly income now||Savings needed at retirement to have
equivalent income for 30 years
Start with a 401(k)
Trick question: Who will be more comfortable in retirement, a high-earner or a modestly paid worker? The not-so-obvious answer: it depends who prepares better.
There are dozens of variables in the equation, including pensions, inheritance, taxes, consumer debt, home appreciation. Health insurance, or lack of it, is the wild card.
But uncertainty is no excuse for inertia. The real key, financial experts say, is spending less than you earn, year in and year out. “The trick,” says Brian Skaggs, a Kent certified financial planner, “is to save, save, save and not spend too much.”
But where to save, save, save? IRAs or Roth IRAs, 401(k)s, college-savings plans? Individual circumstances dictate different combinations. But almost always the best first step is the savings plan at work, where many people have options for tax-advantaged 401(k) or 403(b) accounts. These savings offer most earners a tax break and, often, an employer match. Shoot for saving the amount that triggers the maximum contribution from your company, so no free money is left on the table. After all, would you pass several hundred dollars — or more — in the street and not pick it up?
Later in the game
Ideally you started saving for retirement early in your career, which requires the smallest investment due to the power of interest compounding over time. But if you didn’t Uncle Sam will help you try to “catch up” in your 50s.
If you meet income eligibility limits you can stash away thousands of tax-free dollars right away and up your ante every year. Since 2001, IRA, 401(k) and similar plan-contribution limits have been rising.
The 401(k) limit for most earners 50 and older will be $15,000 next year, for instance, having been previously capped at $10,500. IRA amounts will go up to $5,000 in three years from a longtime limit of $2,000.
Bob Corcoran, a Fidelity Investments vice president, notes that these changes are “a significant opportunity for accelerated savings.”
Quick tip: Adjust your withholding at work to rise along with the increased limits; an extra $2,000 a year is a $38 a week commitment, less after the tax break is figured in.
Sources: Fidelity Investments; www.401khelpcenter.com; Employee Benefit Research Institute
Web and print resources
On the Web
www.401khelpcenter.com Everything you ever wanted to know about 401(k) retirement accounts.
www.ssa.gov/planners/calculators.htm Compute what you can expect from Uncle Sam in retirement.
www.money.com/ultimateretirement Multipart calculator serves as reality check to what your savings plan will yield.
www.fidelity.com/simplestartira One company’s new program of “target-date” retirement fund.
www.adviserinfo.sec.gov Check out who you’re investing with: This is the U.S. Securities and Exchange Commission list of disciplinary actions against financial firms and their employees.
www.aaii.com American Association of Individual Investors site with info on stock picking and analyst recommendations.
www.aarp.org AARP, the advocacy group for Americans who are 50+, offers some of the most comprehensive online material, plus a number of free booklets on topics such as financial planning, health insurance, Medicare. Order from www.aarp.org/booklets or 1-888-OUR-AARP (1-888-687-2277). Many also are available in Spanish. You do not need to be an AARP member. Order by name and stock number:
• Future focus: Your Guide to Financial Planning for Retirement / stock #D17731
• Money Matters: Your Guide to Financial Security / stock #D17732
• Health Insurance During the Working Years / stock #D17738
• “Home Made Mortgages: A consumer’s guide to reverse mortgages,” stock #D15601, can be ordered by phone, or at www.aarp.org/revmort
“Retire on Less than You Think: The New York Times Guide to Planning Your Financial Future” by Fred Brock, Henry Holt/Times Books, 2004, $15. Goes past the hype about the seven-figure stash we all “must” have for retirement to the real-world situations average investors face.
“You Don’t Have to be Rich” by Jean Chatzky, Portfolio, 2003, $16. “Today” show financial guru suggests taming debt and saving what you can toward the future regardless of pocketbook.
“Parlay Your IRA into a Family Fortune” by Ed Slott, Viking, 2005. How to accumulate tax-free wealth and pass it to heirs intact.