Financial Planning: Everything You Need to Know About Your Money (Almost)
The guide to managing your finances, in good economies and bad.
(In a word, be patient.)
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Jon D. Walton, CFP, CLU
Financial Planner, Independence Wealth Services
Walton, who entered the financial planning industry in 1980, specializes in wealth management, which includes retirement, estate and business-succession planning. He is an adjunct faculty member at the University of Delaware, where he teaches financial planning classes to students going for their Certified Financial Planner certificates.
In these economic times: “Money is just a tool. Your risk should be in line with your goals. Invest with a purpose. Now that we’re in this, it’s especially important to remember what your purpose is.”
PLANNING THROUGH THE DECADES
You’re never too young or old to start implementing a financial plan. Here is a guide for working adults.
In Your 20s Now is the time to reduce any credit card debt. “Credit card interest will eat you alive,” says Frederick J. Dawson.
Put whatever money you can into a retirement fund. Peni G. Warren wishes that fact was taught in school.
Carol E. Arnott recommends making monthly contributions to an IRA rather than making a lump sum contribution at year’s end. That way you buy into the market at high and low prices, which average out. If you only contribute once a year, you might hit a low market.
In Your 30s If you haven’t already, you’re probably looking for a house to buy. In the old days, buyers bought the biggest, most expensive house they could afford and “strapped it on,” Dawson says. That philosophy is changing. “I don’t know that going forward personal residences will be the investments they used to be,” he says.
People are getting back to the ABCs of financial planning, Warren says. “Look at what you can afford and look at the worst-case scenario if something happened to you.”
Plan for your children’s education and keep putting money into your retirement accounts. “Tell grandparents to stop buying stuff for the kids and start contributing to their 529 college savings plan,” Warren says.
The rule of thumb is to keep three to six months’ worth of expenses in some kind of liquid interest-bearing account in case of emergency. But you may need more or less money depending on your lifestyle.
In Your 40s Increase contributions to your retirement account. Why? People are living longer, healthcare expenses are going up and “pensions are dinosaurs,” Arnott says.
If you’re considering an early retirement, remember that if you retire at 50 and you live past 80, your money has to last more than 30 years.
Learn from the past. Speculators in the 1990s created a soaring stock market that crashed when the tech bubble burst. Speculators in the real estate market, low-interest rates and loose lending practices drove the price of housing up until that market crashed. In the summer, commodities took a leap.
All this is a case for diversifying your portfolio, which once meant stock and cash. If you opt for investments in commodities, look for an expert. “It’s not for the faint of heart,” says Sherman L. Townsend. “It’s highly speculative and quite volatile.”
Bonds create some stability to smooth out the volatility, Townsend says. There are different types of bonds, however, so you will again need an expert’s advice. Warren recommends bonds that are well diversified.
Real estate, meanwhile, might include private residences, rental properties or an investment in a real estate investment trust.
In Your 50s It’s time to get really serious about retirement. “Sock away as much as you can and put a clamp on your wallet,” Dawson says.
By now you should have pictured your retirement so you know how much you’ll need. But if you haven’t, ask yourself:
• Do I plan to travel mostly the first year or for many years after retirement?
• Do I plan to downsize to a smaller home?
• Can I make sacrifices, such as selling one of our two cars?
• Is it important for me to leave money to my children?
• Do I plan to work part time? Am I willing to in order to maintain my lifestyle?
Too many 50-somethings start to bank on safe investments, such as savings accounts and CDs. “The big mistake people make is getting too conservative,” Arnott says. “The risk is not that you’ll lose your money. The risk is losing purchasing power.” Low-interest accounts are barely keeping pace with inflation.
Though people in high tax brackets may benefit from maintaining a mortgage, most planners prefer that clients have no mortgage going into retirement.
Many 50-somethings’ parents are in their 70s. Look into long-term health insurance, both for your parents and for yourselves. “It can be a tremendous expense if you have to go into a facility,” Warren says.
Finally, make sure your children are starting down the right financial path. “By the time a person is 25, you can see a life pattern as to how they’ll manage money,” Townsend says. “Unfortunately, most are spending more than they’re earning.”
Page 3: Managing a Windfall