Wednesday, February 8, 2012

Basics of Retirement Planning & Saving for College

Last week I covered the 5 initial steps you must take before you can develop a real financial plan which were:
  • ·        Get organized
  • ·        Know your spending habits
  • ·        Understand your Financial Personality
  • ·        Create a realistic budget
We also covered how to protect your plan by addressing ALL the worst case scenarios. In other words, risk management: cash reserve, must have insurance protection, and of course proper debt management. 

Today, we move up the ladder on to how to accomplish your major financial goals. Which are typically: Saving for retirement and saving for your children’s college. But remember, real financial planning is a process, NOT an event. You can’t put the cart before the horse. The info in last week’s post is just as important to your success as the topics we will cover today. I know, I know, retirement planning and saving for college are a little bit sexier, and more exciting to talk about. But I want you to have real game plan, not a piecemeal strategy. 

Retirement Planning Basics:

Key Questions: 

What do you want to do in retirement? Retirement is not a one size fits all deal. Each person has a unique idea of how to spend time in retirement. Do you want to start a new career? Go back to school? Will you work part time, or volunteer?

How much will you need? A 2009 Phoenix Wealth Survey found that 43% of retirees will need 100% or more of their current income. And prepare to live a long time. There is a 65-75% chance you’ll live to age 80, and a 25-35% chance to age 90. Lastly, your income need will likely reduce over time. We will not be “on the go” at age 75 like we were at age 60.

What will your expenses be? Health insurance coverage is likely to be one of your highest costs. Get an estimate on what they will be. Plan ahead!

How much will inflation be? No idea! The Federal Government has more control over this than you might realize. It’s all basically supply and demand. They control how many dollars are in circulation chasing the same goods and services. Just Google “inflation during retirement” and you’ll see how many different opinions there are. Most advisors use 3%. I think that is too low. The truth is no one knows. Gather the data and make an assumption you feel comfortable with.

What will your Tax Rate be? Another really difficult one to estimate. I would say you’ll be in the same tax bracket or higher at retirement. But understand you are likely to be paying payroll taxes since you are no longer working. And, if your age 65 you get a higher standard deduction.

Where to Save Basics?

401k plan up to employer match.
Max out Roth IRA’s: I can show you a negative with almost every investment vehicle out there, but the ROTH really doesn’t have many, if any!
Taxable Accounts: Putting money into taxable accounts can give you options at retirement. Trust me, liquidity will give you options. These assets must be managed effectively to minimize taxes along the way.

Annuities: They are usually never a fit for most. But they can make some sense in rare cases. Work with someone that doesn’t get paid to sell you financial products if you considering these products.
Retirement Spending:

Be careful! Most advisors use a withdrawal rate of 4-5%. Many experts now say that is way too high. 

Where to spend money from 1st: Your plan should consider taxes, liquidity needs, and your estate plan.

Saving for College Basics:

How will you pay for it: Loans, Savings, or Income? All of the above?

Many young parents think about college before retirement. It is my belief that retirement is more important than college. Kids can borrow for college if need be, but you can’t borrow for retirement.

Coverdell Educational Savings Account: Max annual contribution is only $2,000, Income phase out starts a 190k per year,  The best thing about this plan is that the money can be used for primary or secondary school NOT just college.

529 Plan: Basically no max annual contribution if under gifting rules, No income phase outs, Only for college or 10% penalty, Can make the beneficiary anyone you want.

Using the ROTH IRA for College: 10% penalty is waived, One major downside: income withdrawn works against you for financial aid, Unused funds go towards your retirement.

My goal here is to just cover some basic concepts to increase your overall knowledge. To ensure you are on the right track work with a Fee-Only Financial Life Coach by clicking

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