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lifeplanning GUIDE 2012

Beginner's Guide to Building a Budget Countdown to Retirement: Smart Ways to Plan in Your 20s, 30s, 40s and 50s

What Next? Rethinking How We Save

5 Tips for Cutting Debt Pop Quiz: Time to Crunch the Numbers!

Care and Feeding of a College Fund

Pets in the Family Financial Plan


Life Planning Guide • March 2012 •

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6 How to Build a College Fund Saving for college? Finding courage to take the first step may be the biggest hurdle 9 5 Tips for Cutting Debt Putting household finances on a firmer footing calls for deeper changes and fresh thinking

3 • Life Planning Guide • March 2012

4 Beginner’s Guide to Building a Budget A budget is the foundation of a solid financial plan. Here’s a real-world guide to setting one up

10 Saving and Investing Tough economic times left many families with a fearful question: Have the old rules of saving and investing changed forever? 13 Saving for Retirement How to think smarter and plan better for retirement at every stage of life 16 On the Way to a Financial Plan Odds are, you say you have one - but you don’t. Why your family needs a financial plan

18 As for Fido and Fluffy... Pets are full-fledged members of many families and increasingly part of mom and dad’s estate plan 21 Pop Quiz: Time to Run the Numbers Increasing your financial security calls for clear thinking and focus. Take a minute and test your savvy 22 Credit Unions: Power to the People Credit unions are low-cost, low-profile alternatives to commercial banks and high banking fees


Life Planning Guide • March 2012 •

Beginner’s Guide to Building a Budget

Erica Sandberg has this simple advice for consumers thinking about creating a household budget: Don’t forget the small stuff. That includes the monthly manicure, the special holiday bottle of wine, the extra $20 on a birthday lunch for your best friend and that concert you’ve been dying to see. And don’t forget to consider what might happen: a flat tire, a broken tooth or a speeding ticket. Not figuring in life’s many little - and sometimes large - expenses can derail a budget. Sandberg, a personal finance expert and author of “Expecting Money: The Essential Financial Plan for New and Growing Families” (Kaplan, 2008), says the key to a savvy budget is accounting for everything. “Be extremely comprehensive,” she says. “So many people tend to truncate their budgets. They divide their expenses into house, groceries, entertainment. That’s not enough categories. That’s not realistic.” Sandberg believes many consumers overthink a budget. “A budget is just cash flow - money coming in, money going out. If you think of it that way, it’s not so overwhelming.” Consumers who believe that a household budget boxes them in might have designed a plan that’s too inflexible, Sandberg says. “If they feel like they can only spend $300 a month on movies and theater, for example, it makes them feel deprived. But if they realize they can pull money from that entertainment area for, say, new tires for the car, it makes it more flexible.”

A budget is the foundation of a solid financial plan. Here’s an easy, real-world guide to setting one up | by Deb Acord

The key to a successful budget is “a matter of manipulating it so you have money for necessities and things that are important to you,” Sandberg says. Knowing how much money you need and how much you have is paramount for successful budgeting. “Everyone should know off the top of their heads how much they net in a month after taxes. Then, think in terms of 10 percent,” Sandberg says. “Let’s say you bring home $2,000. Everybody who is past fifth grade math knows that 10 percent of that is $200 a month. Try to set that aside. Most people can do it if they try hard enough.” Sandberg suggests people who have credit card balances should try to think of them as loans and attempt to pay them off in six months. Take care of the balances with the highest interest rates first, a tactic that will help save money in the long run. Budgeting can be painful at first, but Sandberg reminds people that it does get easier. It’s like changing eating habits, she says. “At first, you pay really close attention to calorie counts and statistics. But later, it becomes pretty natural. It’s the same with a budget. Once you get used to living within your prescribed numbers, it becomes a part of you.” Here, tips for budgeting, from both finance expert Sandberg and the Federal Trade Commission: • Determine how much money you bring home each month. Include all income - from your job, gifts, tax refunds, unemployment or other government assistance, alimony or child support, pensions,

Social Security and profits from sales of used goods. • Decide how to keep track of your finances. You can choose from phone apps, computer software or good old-fashioned paper and pencil. Decide what’s most comfortable. • List how much goes into a savings account each month. The easiest to remember: 10 percent of your take-home income. • List all predictable monthly expenses those that tend not to change, including rent or mortgage, a car payment, telephone, cable and Internet. • List monthly expenses that can vary - utilities, personal grooming, property taxes, insurance, gas and groceries. • List occasional expenses, for things like manicures, getting your eyebrows waxed, office supplies, holiday gifts or entertainment. • Add up fixed and variable expenses and divide by 12 for a monthly estimate. • If you end up with extra money, carry it over in a savings account for the next month. If you have credit card balances, pay them first instead of building a savings account. Having a savings balance and a credit balance can give you a false sense of financial security. • Be flexible. If something unexpected comes up, such as un-reimbursed medical bills, take care of them by finding other places you can cut. • Realize that once you get used to budgeting, it will become second nature. © CTW Features

Learn more about… Managing your money at ftc.gov (select Consumer Protection and look for Money Matters, under What’s New) Making smart money decisions at extension.org/personal_finance Setting up a template for your budget office.microsoft.com/en-us/ templates (search “home budgets”) Managing money online at mint.com © CTW Features


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Life Planning Guide • March 2012 •

How to Build a College Fund

Saving for college? Finding courage to take the first step may be the biggest hurdle | by Patricia Rivera need, Kantrowitz suggests setting a goal of one-third of expected college costs. “If you focus on the full amount, you’ll feel overwhelmed and you may not even get started,” he says. You should assume that a third of your college expenses will come from savings, a third from future income (such as loans) and the last third from current income, employment and scholarships or aid. Use the cost of tuition the day your child was born as a point of reference. Start with as little as $100 a month, or whatever is feasible. “Once you’re in the habit of saving, it’s easier to save more,” Kantrowitz says. Here are some key ways to invest college funds wisely.

Parents looking to salt away money for both college and retirement can find themselves caught in a giant tug-of-war. Do you make the sacrifice to fund a child’s college education and worry about retirement later? Or do you assume that you’ll find a way to cover college costs with loans or scholarships and focus on your own future instead? Gen Tanabe votes for retirement savings first. “The reality is, there is no financial aid for retirement. If you haven’t saved enough, your children may be left to shoulder the cost of your expenses,” says Tanabe, co-author of “1001 Ways to Pay for College: Practical Strategies to Make Any College Affordable” (SuperCollege, 2011). Students will find a way with aid, jobs and loans, he says. Others believe maximizing savings now, for both retirement and college, is far preferable to planning a future built on student loans. “Every dollar [you borrow] will cost you two, on average, by the time you finish paying off a loan,” says Mark Kantrowitz, founder of college-cost resources Finaid.org and Fastweb.com. “When you’re saving, you’re keeping the interest. When you’re borrowing, you’re paying the interest.”

Most experts agree that, if possible, you should save for both, early and often, particularly given the rising cost of tuition. The College Board found that college costs increased 26 percent in the past five years, an average that includes both four-year public and private schools. Parents have not been able to keep up. They were projected to meet just 16 percent of college costs in 2011, down from 24 percent in 2007, according to Fidelity Investments’ fifth annual College Savings Indicator Study, released in August 2011. But the Fidelity study also found that parents are changing their savings behavior. Some 40 percent of parents with children under age 5 started saving for college costs in a dedicated account, up from 27 percent in 2007. More of them are using a dedicated college savings account like a 529 plan. “Families are planning earlier and saving more efficiently, yet saving for college will continue to be a challenge,” says Joseph Ciccariello, a Fidelity vice president. Kantrowitz says college savings should begin before or immediately after the birth of a child. But he points out that it is never too late to start saving. For those who want to figure out how much they might

Coverdell Education Savings Account allows families to contribute up to $2,000 per child per year. There are income limits. Like an individual retirement account, a Coverdell account can be invested in stocks, bonds, mutual funds, certificates of deposit or money market funds. As the money grows, you are allowed to defer paying federal income taxes. In many states you will not have to pay state taxes, either. You can withdraw the money tax-free for educational expenses at any time. This program, however, is best for individuals with

Learn more about… Federal student loans at studentaid.ed.gov 529 plans at savingforcollege.com Your financial aid application at fafsa.ed.gov Inspiration for college at college.gov © CTW Features


State-sponsored 529 college savings plans, available to families of all income levels, offer much higher contribution limits. Investors select from a platter of mutual funds and other investments. Earnings are tax-free as long as the money is used for qualified education expenses. “Unlike the Coverdell, the money that you invest into a 529 plan must be used for college-related expenses,” Tanabe explains. While 529 plans have proved popular, returns are not guaranteed. Declines in the value of 529 plans are unsettling to families, especially when students are nearing college age. States have added more conservative options to the plans, adding FDIC-insured certificates of deposits, savings accounts and agebased accounts that trim back stock investments in favor of less volatile options as children age. Investors can change asset allocation in 529 plans just once a year. You can participate in any state’s 529 savings plan regardless of where you live, although your state’s plan may offer state-tax breaks or other discounts. Buy a 529 either through a financial adviser or directly. Look for: Low expense ratio and other fees. Determine the annual account maintenance fees, transfer fees and commissions. Investments that are actively managed, such as mutual funds, carry higher fees than index funds. State benefits. Some plans include state-tax breaks. Others offer matching contributions. Study the options. Investment options. Look for a plan that gives you a good mix of investment tracks. Ease of changing account beneficiary. Should your child decide not to attend college, make sure you can change the beneficiary. Whatever you decide, select an option to automatically transfer money from your checking or savings account to your 529 college savings plan account, Kantrowitz says.

7 • Life Planning Guide • March 2012

modified adjusted gross income of less than $95,000, if single, or $190,000 for those who are married and who file taxes jointly.

Top 529 plans State-sponsored college plans in six states received the highest rating in 2011 from analysts at Morningstar, the Chicago-based investment research firm.

Alaska’s T. Rowe Price CollegeSavings plan The Maryland College Investment Plan, managed by T. Rowe Price Nevada’s Vanguard 529 Savings Plan, managed by Upromise Ohio’s CollegeAdvantage 529 Savings Plan, managed by the Ohio Tuition Trust Authority The Utah Educational Savings Plan Virginia’s CollegeAmerica, managed by American Funds © CTW Features

Prepaid 529 college savings plans are the first cousins of 529 plans, Tanabe says. They allow state residents to pay now to lock in prices at a state university. A premium over the current tuition rate is factored in to cover future tuition inflation. Some states have programs that allow families to buy a fixed number of tuition credits at today’s prices. It’s important to read the fine print on prepaid 529 plans to understand how or if your state will handle a shortfall in the event the plan’s investments do not deliver expected returns. Some states have suspended or closed their plans after financial difficulties. Rebate programs such as Upromise or Babymint provide those who sign up with rebates that go into a 529 savings plan when you buy certain products - gasoline, clothing, food - from participating companies. “Again, the most important thing is to start saving, no matter how much it is,” says Kantrowitz. “Every little bit helps.”

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Life Planning Guide • March 2012 •


Brown-bagging will get you only so far. Putting household finances on a firmer footing calls for deeper changes and fresh thinking |

Thirteen-point-eight trillion dollars is a mighty big sum. Yet, for years, we hardly noticed it. Now it’s commanding our attention. From 2000 to 2008, Americans doubled the amount of mortgage and by Marilyn Kennedy Melia consumer debt they held, until it came to $13.8 trillion, according to the U.S. Federal Reserve. You know the rest of the story: The financial world collapsed and frightened consumers got out their calculators to total up their tabs. From the $13.8 trillion peak, households have reduced that debt by half a trillion dollars and counting. There’s still a long way to go, economists believe, before Americans achieve healthy balance sheets. Consumers have “learned the hard way that being approved for a loan and being able to afford that loan are two very different things,” says Kim McGrigg, community relations manager for nonprofit counseling agency Money Management International, based in Sugar Land, Texas. Even when the economy is back on track, households should abandon the “everyone is doing it, so it must be OK” spending mentality, McGrigg says. Instead, families and individuals should focus on their own designate some cash for splurges. Paying personal financial security. Does a pile of bills stand between you and financial peace? for the fun stuff in cash is important, he Here are some new ways to approach making a dent in debt: says, since studies show that we’re more reluctant to spend when we must fork But budgets have the big benefit over actual dollars. Track what you spend of ensuring that necessities are paid. You’ve probably heard the Moreover, there are ways to budget to Set goals and work conventional wisdom: Just give up your allow a “yes” to some purchases, says toward them morning latte and you’ll find financial Stuart Vyse, a psychology professor at Once you’re on a budget, you’re likely security. Connecticut College in New London, to replace the pleasure that once came It’s more complicated than that, Conn., and author of “Going Broke: with spending with the gratification of of course, but insignificant purchases Why Americans Can’t Hold On To Their seeing debt disappear. can gobble big sums. Michael Collins, Money” (Oxford University Press, 2008). “Specific short-term goals help keep director of the Center for Financial Vyse keeps two checking accounts. people motivated,” Collins says. Security at the University of Wisconsin, One is dedicated to necessary expenses; While it may be tempting to pay suggests keeping a list of everything a monthly automatic deposit guarantees off debt with the smallest balance first you spend for at least a few weeks. By that money is there to pay the essentials. - rewarding, because you see “progress” tracking every purchase, you discover Experts advise choosing any system quickly - focus instead on paying off what discretionary purchases can go; that allows you to separate money for debt that carries the biggest APR. You’ll devote that sum to debt reduction. necessities. Of course, it’s important to save more money in the long term by pay more than minimums due on credit working down larger, higher-interest Make a budget card debt. debts first. Even for those who are discouraged Additionally, Ithaca College (Ithaca, by debt, the word “budget” can spark N.Y.) consumer psychology expert Don’t grow old with debt even more disheartening visions of Michael McCall recommends that you Unfortunately, there is no standard denial.

guideline on how much mortgage or credit card debt is dangerous, Collins says. But it’s not smart to continue to rack up high-interest debt now, intending to pay it off sometime down the road. Older people who carry debt face a daunting challenge simply because they have a shorter time horizon to clear the slate before they retire. “Your income is going to shrink [in retirement], and if you’re still carrying credit card debt, then you could actually have negative cash flow each month,” warns John Ulzheimer of SmartCredit. com. While they may plan to extend work, debt-burdened pre-retirees usually must cut spending to the bone. “Educate yourself,” suggests Barbara Whitehead, co-author of “For A New Thrift: Confronting The Debt Culture” (Broadway Publications, 2008). Research ways to work down debt and learn how to allocate dollars between savings and debt reduction, she says. Become a reluctant spender How much of your debt is due to spending on things you thought you must have and now hardly care about? Instant gratification is responsible for a lot of the debt burden, Vyse says. Moreover, we’re subject to constant temptations. “The world has changed dramatically, “ he says. “In the 1970s, when we went home at night we were out of the marketplace. Now you can go online or shop anytime.” Before handing off your credit card, ask: “What harm would there be if I don’t buy this right now?” Wait a day and it’s likely you will have forgotten the item that would only add to your debt woes, Vyse says. © CTW Features

9 • Life Planning Guide • March 2012

5 Tips for Cutting Debt


Life Planning Guide • March 2012 • 1

Saving and Investing: What Next? Tough economic times pushed many families to the brink and left others with a fearful question: Have the old rules of saving and investing changed forever? | by Dawn Klingensmith Feeling distrustful of the stock market and insecure about your finances and investments? Financial adviser David Gottlieb sits down with people like you almost every day. Into his Pepper Pike, Ohio, office he welcomes an all-American parade of average savers and investors - newlyweds, single moms, families with kids to put through college, couples about to retire - most with a single uneasy question: Has the mortgage industry meltdown, the housing collapse and the rickety economy changed the rules of personal finances and investing? His short answer: No. Gottlieb does suggest that his clients make one radical change: Tune out the headlines. “I hear the same rant all the time about the president, the economy, the global economy, Greece. People are making decisions based on headlines and emotions,” which costs them in the end, says Gottlieb, a financial adviser for Edward Jones. Investors were clobbered with massive investment declines in 2008; however, the recession officially ended more than two years ago. Those who stayed the course have done well since 2009, compared with those who yanked money out of the stock market in a panic. “If anything, the economic climate reinforces basic financial principles,” says Ruth Ann Potts, manager of advanced planning at Country Financial in Bloomington, Ill. The aftermath of the great recession is a good time to review those basics and consider some new approaches, based not on doomsday newscasts but on your individual circumstances and goals. What have we learned since the great fall? A lot. Take a deep breath and stay the course The market crisis of 2008 proved that diversification offers no guarantee against losses; however, it tends to reduce the damage. Maintain a diversified, balanced portfolio, Potts advises, and don’t let a market slump change your long-term investment plan. Historically, the market consistently and reliably recovers. A down market may even present an opportunity to add holdings and accelerate your recovery. But keep in mind that stocks are risky by definition; that’s why they have high expected returns. Just because the market historically recovers does not mean that your risk vanishes in the long run, no matter how long you hold onto a stock, warns Zvi Bodie, co-author of “Risk Less and Prosper: Your Guide to Safer Investing” (Wiley, 2011). Embrace your risk tolerance In the wake of the market crisis, “A lot of people realized they don’t have as much tolerance for risk as they thought and are making adjustments,” Potts says. Assessing risk tolerance used to be hypothetical: How will you sleep if your investments drop

in value by 10 percent or 50 percent? Now, it’s real and observable: When the markets crashed, did you buy, hold or sell your stocks? Because you lock in losses if you unload stocks during a market slump, Potts recommends that risk-averse individuals not make adjustments to investments already tied up in a 401(k) account. “Focus on where you put new contributions,” she says. Funnel new contributions and investments “into vehicles you’re more comfortable with.” Consider safer investments Bodie believes that the riskiness of stocks is understated and that many investors have too much allocated to stocks and not enough allocated to safer, inflation-indexed investments. Risk-averse investors in particular should see how far a low-risk investment strategy will take them, and then make adjustments to meet savings and retirement goals. “For safety and

protection against inflation, Treasury Inflation-Protected Securities and U.S. savings bonds called I Savings Bonds are unsurpassed,” says Bodie, a professor of management at Boston University. “Initial investment is guaranteed, and return is paid in inflation-adjusted dollars.” Don’t overcorrect or under prepare Economic collapse made a big impression on young investors. “This painful economic environment has affected the risk appetite of the 20- and 30-something set. At a stage in life where they can most afford to take on additional risk with their retirement savings, huge numbers of young folks are not,” says former portfolio manager and financial literacy advocate Manisha Thakor, of Santa Fe, N.M. “The problem with this is that it sets them on a path to be under-saved for retirement when they hit their 50s and 60s, and thus they may end up taking on too much risk when they can least afford to, where there are fewer years on their side.” Don’t be retirement-rich and cash-poor “People are putting money in 401(k)s but not in the bank,” Gottlieb says, adding that investors have somehow gotten the impression they need to retire with a million dollars. Consumers also have been advised

Learn more about… Financial planning at every stage of life at mymoney.gov Buying U.S. treasury securities online at treasurydirect.gov Using credit wisely at federalreserve.gov/consumerinfo/ default.htm © CTW Features


mitzvah. “I understand people will fight me on this and say [the money] is not making interest. But cash gives you the ability to buy things, not borrow things. “The rate of return is not the issue,” he says. “It’s having money on hand when you need it.” Treat education as an investment Student-loan debt now eclipses credit card debt. “As the price of education has risen and wages have stagnated, it’s no longer a no-brainer that any educational debt is good debt,” Thakor says. “In the current environment, it is essential to step back and think strategically about how much you are paying for an education relative to the earnings you expect as a result. When the return on investment isn’t as high as you’d like, it’s time to think creatively. That may mean living at home while going to school or taking a year or two off before even starting school to live at home, work and save. Or, start at a community college and then transfer to a state school. “The point is to view education as any other valuable asset and make sure the return justifies the up-front investment.” © CTW Features

11 • Life Planning Guide • March 2012

that anytime they come by extra cash, such as a bonus, they should use it all to pay down credit card debt. Gottlieb says to use some or most of it to chip away at your balance, but to keep the rest “just for the sake of having cash again and paying for things in cash instead of feeling broke all the time and charging things.” Beef up your emergency funds, too. Having the equivalent of three to six months’ salary or living expenses set aside is still the recommended minimum, Potts says, but high unemployment rates and the struggling economy suggest six to 12 months’ worth might be more prudent. In addition to an emergency reserve fund, have a “put-and-take” savings account for unexpected day-to-day expenses like home appliance repairs or occasional splurges, Potts recommends. If you are saving for a particular item or event, consider opening a separate “earmarked and untouchable” account just for that: “You almost need to open up different accounts for different savings goals so you won’t touch it. When you put everything in a general account, it gets spent,” says Gottlieb, who has an account designated for his daughter’s bat


Life Planning Guide • March 2012 • 12

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Saving for Retirement: The Timeline

How to think smarter and plan better for retirement at every stage of life | byTaniesha Robinson Funding retirement is easy. Just ask planner David Schaeffer. “Make all you possibly can. Save all you possibly can.” And, start early. Often, the people asking him for help on the eve of retirement didn’t screw up their investments. “It’s not that they did something wrong. It’s that they never did something,” says the Schaeffer, , a retirement planner with Futurity First Insurance Group in Phoenix. There’s something for folks at every age to learn about saving and investing for retirement. Start here. In your 20s Saving for retirement savings isn’t a hot topic among 20-somethings. But young people develop financial habits and make life decisions that can have lifelong consequences. “The kind of job you get when you’re young, in your 20s, can have a big impact on your lifetime security,” says Anna Rappaport, a consultant for the Women’s Institute for a Secure Retirement, Washington D.C. “A teacher or a policeman gets into a public pension plan. That’s a lot different from getting into an occupation where there’s likely to not be much benefit.” Tip Today, expected retirement income from pensions or 401(k) accounts must be coupled with disciplined lifelong Start early. A 25personal savings, says Bonnie Sewell, principal financial year-old who saves 15 percent planner at American Capital Planning, Washington, D.C. a year is likely to “This is the easiest time in your life to save if you don’t buy be able to afford to retire at 62. “If into an expensive lifestyle,” Sewell says. “Regardless of your you start later, age, your focus should be on disciplined saving and less on you need to save investments.” more,” Rappaport says. It can be difficult for someone who just entered the labor force to think about saving for retirement. “If it feels better

to call it ‘choices savings’ rather than retirement, do that,” Sewell says. Early savings allows more “choices” later on: career changes, marriage, divorce, health issues and more. The Schaumburg, Ill.-based Actuarial Foundation recommends people who begin saving in their 20s to put away about 10 percent of their income, a common rule backed by other financial advisers. If they are able, Sewell and Schaeffer recommend those in their 20s save up to 20 percent of income, which they say is ideal.

In your 30s This is the time to eliminate debt and be smart about a home purchase. “Hopefully, college debt is behind them and the only loans in place are well-managed, auto- and housingrelated loans,” says Schaeffer. If your employer does not match a portion of your contributions to a company 401(k) plan, Schaeffer says, it could be worth seeking out one who does. Job changes and even career changes are common at this stage. “If you enter a defined contribution plan and if you have good savings levels at every job, career changes are fine,” Rappaport says. This may be the time a young couple welcomes their first child. When women take a break from work for childbirth and child-rearing they lose immediate income and also lower their lifetime earnings, reducing retirement benefits. Sewell says the wife should propose that half her husband’s savings during that time fund the retirement accounts. Continue to save in a Tip disciplined fashion, Because women even if investments tend to live longer, are growing they need to save more aggressively. steadily. Back in the day, an investor could simply pick a sound allocation of funds within a 401(k) and “everything would be fine,” Schaeffer says. This is


Life Planning Guide • March 2012 • 14

no longer true. Individuals who begin their retirement savings in their 30s should save around 13 percent of their income, according to The Actuarial Foundation.

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In your 40s “You should be Tip approaching peak To determine earning years,� whether you’re on Schaeffer says. track in your savings try the AOL’s “College may be "Am I Saving competing with Enough? What Can I Change?" retirement for your calculator at savings dollars. calculators.aol. If your lifestyle com/tools/aol/ retire02a/tool.fcs will allow, save aggressively.� Home and auto loans, bills and retirement savings alone can cause financial strain during this life stage. But the addition of college tuition payments can make it unbearable, even for families that have made all the right financial steps thus far. According to a 2008 study from the National Center on Higher Education and Public Policy, college costs are roughly a third of the median family income for lower-middle-class Americans. The Actuarial Foundation advises parents to ask children to help pay for their education with earnings from summer and part-time jobs, scholarships and loans. “If you make bad decisions on cars and mortgages and college, you’ve shot yourself in the foot,� says financial planner Sewell. The Actuarial Foundation recommends those who begin saving in their 40s to put away 20 percent of income. In your 50s It’s time to sock away every nickel. Ideally, for savers of this age, mortgage costs should be in the range of 10 percent of income, Schaeffer says, and auto costs should be low. “College costs are behind you and you are

in the 20-year home stretch to Tip retirement,� he Learn what your says. estimated social Make “catchup� security benefit will be at retirecontributions ment by using the to retirement retirement estimator at savings now, if www.ssa.gov/ necessary. Resist estimator or call any permanent 800.772.1213. withdrawal of retirement funds, especially before age 59.5, when earlywithdrawal penalties disappear. Most account withdrawals will be taxed. Individuals who’ve just begun their retirement savings during this life stage need to save around 40 percent of their income, according to the Actuarial Foundation. At age 65 Full Social Security benefits kick in at this time, but it’s not going to be the reward that past generations saw. If retirement savings have been lackluster over the years, there are some rescue options. “There’s no reason that people who haven’t saved enough are doomed to a spartan existence, unless Tip they insist on living Sell assets that in a high-class area are not producing or continue to much income or growth, such as spend at a level that undeveloped land is unsustainable,� or a vacation home, and invest Sewell says. in income-producShe suggests ing assets. taking on an extra job - part-time may be enough - and perhaps creating a stream of income on the side from selling something you make or providing a service, from building websites to de-cluttering homes. Retirees can expect to spend 4 percent of retirement assets annually to stretch savings over their remaining years, Schaeffer says. More than that is a problem. Š CTW Features


15 • Life Planning Guide • March 2012


Life Planning Guide • March 2012 • 1

On the Way to a Financial Plan Odds are, you say you have one, but you don’t. Why your family needs a financial plan | by Dan Rafter With the economy in turmoil, there’s rarely been a more important time for families to draft a detailed financial plan. Such a plan, including strategies for achieving big life milestones (education, buying a home and retirement), saving, investing and dealing with inevitable setbacks, can help steer families through challenging times. Few of us are prepared. Some 79 percent of people claim to have a financial plan, according to a 2011 survey by the Certified Financial Planner Board of Standards, but this number is misleading. Nearly half of those with a plan, 46 percent, say that it exists only in their heads; 11 percent say they only have written down some notes or ideas, not a complete plan. Financial planner Simon Singer says too many families spend more time planning a vacation than they do making decisions about their life’s finances. A financial plan, like a vacation, requires setting a destination and establishing an itinerary. “You need to know where you are going and how you’re going to get there,” says Singer, founder of Advisor Consulting Group, Los Angeles. Families need to know where they stand financially, even if their finances are in disarray. Doug Hendee, certified financial planner for Brighton

Learn more about… Investing and consumer protection at investor.gov The basics of investing at investoreducation.org Effective ways to save at consumerfed.org (click on Financial Services)

Securities, Rochester, N.Y., sees many families who ignore financial troubles in hopes they’ll simply disappear. “So many people are embarrassed to look at their finances,” Hendee says. “But ignorance in this case is not bliss. How will you know what you need to do if you don’t take a look at your financial situation to figure out where you stand? The good news is that crafting a financial plan doesn’t have to be an unpleasant chore. The most important part of any financial plan also is the simplest: a budget. A budget should take into account the money a family brings into the household each month. It also should list all of a family’s expenses. These should be divided into two main categories. Fixed expenses are those that don’t change from month to month: insurance payments, mortgage payments, student loans. Then there are discretionary or charges that fluctuate month to month, including utility bills, gas, entertainment spending and groceries. “Families need to know where their money is coming from and where it is going,” says Nancy Skeans, partner with Schneider Downs Wealth Management Advisors in Pittsburgh. “If they don’t understand that, it’s almost impossible for them to understand how much they can save and where they can cut expenses.” Families shouldn’t focus too much on the small details of a financial plan, Hendee says. What’s most important is that they start putting together a financial plan as soon as possible, even if it’s not yet complete. © CTW Features

In Search of a Financial Adviser The key to finding the right investment services provider is asking the right questions – both of yourself and of prospective providers. Following are some questions from the Coalition for Investor Education, a group of state securities regulators, consumer advocates and financial planning and investment advisers, to help you identify the right provider for you. Remember, there are no foolish questions. Any reputable provider should be happy to discuss these issues with you and answer any questions you may have. Do you need help developing strategies to reach your financial goals or do you simply want suggestions on appropriate investment products to implement your goals? Do you prefer working with someone who is primarily considered a salesperson, an adviser or a combination of the two?

Do you prefer paying for investment services through a fee, commissions, a percentage of assets in your account or a combination of these? How important is it to you that your provider have a legal obligation to act in your best interests and disclose potential conflicts of interest?

© CTW Features © CTW Features

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As for Fido and Fluffy… Pets in the family financial plan? It’s not as far-fetched as it sounds. More pet owners are seeking ways to care for their animals should they die unexpectedly before their pet. Sensational celebrity pet tales are one reason for the uptick; Leona Helmsly, the controversial New York real estate investor, notoriously left $12 million to her dog, Trouble, in 2007. “There were a couple of big, notorious cases, with people leaving millions of dollars to their pets,” says Danny Meek, a financial consultant who runs Pet Trust Law Blog, a website that helps pet owners incorporate pets into estate planning. “The public took

Pets are full-fledged members of many families – and, more often these days, part of mom and dad’s estate plan | by Lindsey Romain notice and thought, ‘Maybe this is something I can do for my pet.’” The instinct to plan for Fido’s or Fluffy’s extended care parallels the rise in the notion that pets are full-fledged family members. In a May 2011 survey of 1,500 pet owners by PetMD, the majority of respondents (73 percent) said if they could only have one friend, they would choose their dogs over a human. More than 8 in 10 surveyed by dog-treat company Milo’s Kitchen said dogs are an equal member of their families. Fifty-eight percent said they are comfortable calling themselves “mommy” and “daddy” when referencing their dogs, and 35

When Mommy and Daddy Divorce The death of an owner isn’t the only legal hurdle for pets. Divorce also can make things ugly. David Pisarra, a child custody lawyer and co-author of “What About Wally? Co-Parenting With Your Ex” (Libero Media, 2011), suggests that pet owners who divorce should be mature and concise about pet parenting, should both owners choose to stay in the life of the pet. “In my experience, having a thoroughly drafted plan that you can each refer to reduces confusion over who is responsible and what you have agreed to,” Pisarra says. “That takes away the friction of miscommunication so you can just relax and enjoy your pet’s love.” He notes that courts are often reluctant to recognize pet-sharing plans, which makes these selfdeveloped plans even more worthy. If a co-parenting arrangement promises to be too stressful for a high-strung pet, Pisarra says owners should try to recognize the harm it may cause and work together to establish a different plan. “There are always situations where one parent needs to let go,” he says. “But even in those cases, a parenting plan can still allow for occasional visits and time-sharing. Dogs are generally more OK with travel than cats, so the type of pet is also a factor.” © CTW Features


Budget optional The amount left in a fund in completely dependent on the lifestyle of the pet and how much the owner chooses to leave in their name. “Some pets have a very simple lifestyle,” says Meek. “Some pets get a $75 pet massage twice a week. If a pet is accustomed to that lifestyle, the owner

invariably wants the pet to have that same lifestyle after they’re gone.” Horses, for example, are expensive to maintain, and thus their fund should reflect that. The number of pets left behind would also determine the amount. Although amounts earmarked for pet trusts are as unique as animals and their owners, Hirschfeld says the average pet trust fund is about $25,000. “We had somebody leave close to $1 million to take care of their pet turtles,” she says. Who gets Fido? Often the most difficult part in establishing a pet trust fund is selecting a primary caretaker. “It’s very difficult for people who don’t have close friends and relatives,” says Meek. Many people without close contacts want to leave their pet with their veterinarian - not a good option, says Meek, since they don’t typically have the time or inclination to take on the job. A wiser option if no friend or relative has agreed to provide care, says Meek, is to leave the pet with the Humane Society along with money for the pet and a donation to the society. Pet death A pet trust fund should designate where remaining money should go in case the pet dies before its funds run out. “The money could go the caregiver or to a charity,” says Meek. © CTW Features

19 • Life Planning Guide • March 2012

percent refer to their dog as “son” or “daughter.” By 2013, the American Pet Products Association predicts that the pet insurance market will reach $400 million. “As people grow older, they lose their family members, and they really start accepting these pets as their family,” says Meek. And what better way to honor that bond than to provide continuing care for an animal after mommy or daddy has passed? The cost of taking on an animal’s care is one consideration. According to the American Society for the Prevention of Cruelty to Animals, the estimated cost of annual pet care and maintenance can range from $270 for a small bird to $1,845 for a large dog. Close friends and family members may not be prepared to take on the sudden expense of an orphaned pet. Beyond food and shelter, most pet owners are concerned about setting up loving care for their pets. Effective post-life animal care is possible by providing for pets in wills, trusts or other specialized financial documents. The average cost of setting up a pet trust fund can range from $500 to $1,500, although it can be done for less. Rachel Hirschfeld, a New York lawyer and animal rights activist who specializes in estate planning, developed a simple online protection agreement that allows a pet owner to make sure a pet is cared for by someone the owner trusts. The doit-yourself agreement is a quick, cheap ($39) way to provide for a pet’s care “should the unthinkable happen.” “I found that a lot of people weren’t doing pet trust funds because they were too expensive or time consuming, or they were too concerned with legal things,” says Hirschfeld. “Only the rich dogs were protected.”


Life Planning Guide • March 2012 • 2

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Mutual fund fees quietly add up. The difference of half a percentage point - a fund that charges 0.75 percent vs. a fund that charges 0.25 percent - costs an investor with $100,000 invested in mutual funds in a 401(k) account how much more per year? a. $50 b. $100 c. $250 d. $500

Q 01

Q 02

What percentage of middle class Americans have no written financial plan? a. 19 b. 39 c. 59 d. 69

What’s the best strategy for paying off debts: Q a. Pay off smallest debts with a low APR first, 03 in order to reduce your overall number of loans b. Concentrate on paying off the biggest debt with the highest APR first

Q 04

The graduates of 2011 are the most indebted class in history, with an average student loan debt load of: a. 7,300 b. 17,300 c. $27,300 d. $37,300

Don’t tell us you’re no good at math. Or, you forgot your calculator. Or, you have to get back to Angry Birds. Increasing your financial security calls for clear thinking and focus. Take a minute and test your savvy

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Are the following statements about credit unions True or False? a. Credit unions are nonprofit financial institutions. b. Credit unions are owned and controlled by members, not profitseeking shareholders c. Credit unions offer fewer services than regular banks d. Credit unions are restricted to employees of certain companies or organizations e. Profits at a credit union go back to members in the form of lower fees

Q 05

Q 06

Q 06

Postponing retirement until age 70, rather than claiming Social Security at age 62, results in a benefit that is: a. 75 percent higher b. 55 percent higher c. 35 percent higher d. 15 percent higher

Q 07 Q 08

Q 09

Q 10

Average life expectancy of a U.S. citizen: a. 68 c. 88 b. 78 d. 90 In the wake of the great recession, what proportion of parents provide grown children financial assistance? a. 25 percent b. 33 percent c. 50 percent d. 66 percent What’s the average wage for U.S. workers? a. $33,000 b. $43,000 c. $53,000 d. $57,000 What is the annual percentage rate on a new credit card? a. 12.99 percent b. 13.99 percent c. 14.99 percent d. 15.99 percent © CTW Features

10 correct: Warren Buffet wants to friend you! 9 correct: Close… less Angry Birds, more Suze Orman! 8 or less correct: It’s time to do some homework! 1. d: $500 per year 2. d: 69 percent 3. b: Although many people choose to eliminate small debts first, which makes them feel they are making progress, they’d save more money long-term if they paid off larger, higher-interest debt first 4. c: $27,300 5. a: T b: T c: F d: F e: T 6. a: 75 percent higher 7. b: 78 years 8. d: More than two-thirds, or 66 percent, double the rate of 20 years ago 9. b: $43,000 10. c: 14.99 percent as of Nov. 2011

21 • Life Planning Guide • March 2012

Pop Quiz: Time to Run the Numbers


Life Planning Guide • March 2012 • 2

Credit Unions: Power to the People Credit unions offer low-cost, low-profile banking solutions that keep members in mind | by Laura Drotleff

Drive through Rhode Island and you’ll see a Dunkin Donuts and a bank on nearly every corner. But just across the road from that national bank is a locally owned credit union whose growing customer base is making it a formidable opponent to the country’s biggest commercial banks. As the Buy Local trend trickles into finance, more and more customers are choosing to do business with their neighborhood credit union. “Last year, we saw one million new credit union members. We will see more than that in 2012,” predicts Bill Cheney, president and CEO of the Credit Union National Association. Customers are rediscovering the services offered by local credit unions, which are non-profit, member-owned alternatives to banks that provide all of the same services, according to Cheney. “By moving to credit unions, consumers will save about $70 a year, on average,” he said. Studies have shown that people living paycheck to paycheck save even more at a credit union than the average customer, because they utilize more credit union services. Because they are member-owned, credit unions are able

to offer better rates and lower fees, virtually across the board, Cheney says. This includes higher savings rates and lower interest rates, even in this low-interest environment. “Credit unions use money to help people. Credit unions truly are groups of people coming together to help each other,” Cheney said. Small business owner Matt D’Arcy, a financial planner who owns Greybridge Financial Group and is vice president and coowner of Hupp Tax in Willowick, Ohio, says perhaps because of the non-profit status of credit unions, their management often has more longevity, allowing them to develop rapport with members. At a time when families are facing tough economic challenges, feeling a sense of security and trust with a banking institution is more than just good customer service - it’s one less thing to worry about. “With a credit union, you may encounter the same manager for 30 years, and you can really develop a time-trusted relationship and know that they will go to bat for you,” D’Arcy said. Joining a credit union, however, has a process unlike other banking institutions.

Credit unions have different membership eligibility requirements. Still, nearly everyone has a credit union they can join if they do their homework. With a little research, you can find a credit union you are qualified to join. For example, Michigan State University Federal Credit Union (MSUFCU), based in East Lansing, Mich., is owned by 162,000 members in the Michigan State University and Oakland University communities. The membership includes students, alumni, faculty and employees, local schools and businesses. Tuscon Old City Pueblo Credit Union in Tucson, Ariz., is limited to city employees and select groups. In the Ocean State, you can find credit unions with a variety of membership requirements. As a student at Michigan State University, Michelle Gutierrez belonged to MSUFCU. Now an alumnus living in Kerrville, Texas, more than 15 years later, she says she has remained a credit union customer. “We never changed,” she said. “We have just always made the conscious decision to go with local federal credit unions first. They have always had their members in mind.” © CTW Features

Learn more about… Joining a credit union at asmarterchoice.org Comparing credit union rates versus bank rates at ncua.gov (look under Resources and Information) Making smart financial decisions at mycreditunion.gov © CTW Features


23 • Life Planning Guide • March 2012

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Life Planning Guide • March 2012 • 2

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