People lose their jobs. Marriages fall apart. Breadwinners get sick. You want to be in a position to bounce back. That’s why it’s important to take a proactive approach to smart saving and retirement planning.
“The last thing you want to do is face a financial crisis at the same time you face a life challenge,” says Key Bank director of planning strategies Carol Craigie.
Nurturing your retirement nest egg begins with quantification and clarification, says Timothy Adkins, senior vice president and a branch manager for Wachovia Securities. What are your goals, and how can you get there?
Our inability to save is widespread: According to the U.S. Department of Health and Human Services, 95 percent of Americans over the age of 65 can’t afford a retirement lifestyle equal to what they had while working — a statistic that hasn’t really changed in 20 years.
Clevelanders are no exception. We don’t exactly shine when it comes to stashing away cash for our golden years, according to the findings of A.G. Edwards & Sons Inc.’s 2007 Nest Egg Index. The city ranked No. 230 in a list of 500 towns judged on factors such as savings deposits, personal debt levels and net worth. Ohio fell from 23rd to 26th among the 50 states.
It’s never been more important to take control of your future. Here is how five families successfully dealt with the financial obstacles life threw their way.
“The last thing you want to do is face a financial crisis at the same time you face a life challenge,” says Key Bank director of planning strategies Carol Craigie.
Nurturing your retirement nest egg begins with quantification and clarification, says Timothy Adkins, senior vice president and a branch manager for Wachovia Securities. What are your goals, and how can you get there?
Our inability to save is widespread: According to the U.S. Department of Health and Human Services, 95 percent of Americans over the age of 65 can’t afford a retirement lifestyle equal to what they had while working — a statistic that hasn’t really changed in 20 years.
Clevelanders are no exception. We don’t exactly shine when it comes to stashing away cash for our golden years, according to the findings of A.G. Edwards & Sons Inc.’s 2007 Nest Egg Index. The city ranked No. 230 in a list of 500 towns judged on factors such as savings deposits, personal debt levels and net worth. Ohio fell from 23rd to 26th among the 50 states.
It’s never been more important to take control of your future. Here is how five families successfully dealt with the financial obstacles life threw their way.
The Ovseks
Challenge: Adjusting to a career move
Strategy: Begin saving early to build a cushion and align goals with values
Challenge: Adjusting to a career move
Strategy: Begin saving early to build a cushion and align goals with values
John and Kelly Ovsek would like a monthly subscription to XM Satellite Radio. But by not signing up, they’re sending a loud signal to their daughters, 10-year-old Peyton and 8-year-old Camryn: It’s important to distinguish between wants and needs.
That’s a lesson John, 50, learned from his parents, who used to drive him to the bank after he received birthday or Christmas money, so he could deposit a portion of it. They taught him to consider 20 percent of his after-tax income as a fixed expense that went to savings.
“If you learn those lessons early on, you’ll continue the discipline of adhering to the plan,” he says.
John’s frugal mind-set enabled him and Kelly, 38, to amass a rainy day fund that grew to be much larger than the six months’ worth of salary reserves prescribed by many financial planners. The cushion came in handy last year, when John’s position as vice president of a housing-market firm was unexpectedly terminated.
“Sudden loss of income tends to lead to quick, emotional, inappropriate behavior,” says Ted Sadar, owner of Sadar Financial Management in Akron. “The key is to have enough reserves built up so you don’t have to worry.”
John was calm. Besides, he was tired of working 60-hour weeks, traveling frequently and not spending enough time with his wife and daughters.
“I viewed the job change as an opportunity to attain more balance in my life,” he says. He soon accepted a sales position with a privately owned firm on Cleveland’s East Side, turning down higher offers from firms in Cincinnati and Austin, Texas. The decision allowed the Ovseks to stay in Moreland Hills, where the couple is active in the community. (Kelly is a real-estate agent and a councilwoman.)
John and Kelly try to align their values with their fiscal goals. One value is freedom, so they have a minimal mortgage payment. Another value is peace of mind, so they never carry a credit card balance. They saved enough cash to buy their two cars without financing them. “When we make a big purchase, we decide together on an acceptable amount,” John says. “Then we stick to it, instead of being swayed by extras.”
John is teaching Peyton and Camryn the importance of saving for the future early in life by illustrating the power of compound interest — lessons his parents passed down like this one: If a 14-year-old invests $2,000 in an account with a 10 percent annual return every year until she’s 18, that investment will have grown to $900,000 by the time she reaches retirement. However, if she waits until she’s 27 and then invests $2,000 in a similar account every year until she’s 65, the result is only about $800,000. In the end, the 14-year-old, invests $68,000 less and earns roughly $100,000 more.
“The greatest challenges we face as a family today are planning for the financial unknowns,” John says. “What will a college education truly cost when our girls are ready to start school? Will we have unexpected medical challenges? We have no retirement health care coverage from our previous employers, so what will coverage cost when we’re ready to retire? We don’t have all the answers, but we have a solid foundation.”
The Solanos
That’s a lesson John, 50, learned from his parents, who used to drive him to the bank after he received birthday or Christmas money, so he could deposit a portion of it. They taught him to consider 20 percent of his after-tax income as a fixed expense that went to savings.
“If you learn those lessons early on, you’ll continue the discipline of adhering to the plan,” he says.
John’s frugal mind-set enabled him and Kelly, 38, to amass a rainy day fund that grew to be much larger than the six months’ worth of salary reserves prescribed by many financial planners. The cushion came in handy last year, when John’s position as vice president of a housing-market firm was unexpectedly terminated.
“Sudden loss of income tends to lead to quick, emotional, inappropriate behavior,” says Ted Sadar, owner of Sadar Financial Management in Akron. “The key is to have enough reserves built up so you don’t have to worry.”
John was calm. Besides, he was tired of working 60-hour weeks, traveling frequently and not spending enough time with his wife and daughters.
“I viewed the job change as an opportunity to attain more balance in my life,” he says. He soon accepted a sales position with a privately owned firm on Cleveland’s East Side, turning down higher offers from firms in Cincinnati and Austin, Texas. The decision allowed the Ovseks to stay in Moreland Hills, where the couple is active in the community. (Kelly is a real-estate agent and a councilwoman.)
John and Kelly try to align their values with their fiscal goals. One value is freedom, so they have a minimal mortgage payment. Another value is peace of mind, so they never carry a credit card balance. They saved enough cash to buy their two cars without financing them. “When we make a big purchase, we decide together on an acceptable amount,” John says. “Then we stick to it, instead of being swayed by extras.”
John is teaching Peyton and Camryn the importance of saving for the future early in life by illustrating the power of compound interest — lessons his parents passed down like this one: If a 14-year-old invests $2,000 in an account with a 10 percent annual return every year until she’s 18, that investment will have grown to $900,000 by the time she reaches retirement. However, if she waits until she’s 27 and then invests $2,000 in a similar account every year until she’s 65, the result is only about $800,000. In the end, the 14-year-old, invests $68,000 less and earns roughly $100,000 more.
“The greatest challenges we face as a family today are planning for the financial unknowns,” John says. “What will a college education truly cost when our girls are ready to start school? Will we have unexpected medical challenges? We have no retirement health care coverage from our previous employers, so what will coverage cost when we’re ready to retire? We don’t have all the answers, but we have a solid foundation.”
The Solanos
Challenge: Providing as a single mom after a divorce
Strategy: Track expenses closely and live beneath your means
Strategy: Track expenses closely and live beneath your means
When Angela Solano finalized her divorce in 2004, she made a rule to start writing on ruled paper. The financial security stemming from a dual-income household was gone, she recalls. “I suddenly felt the weight of the world on my shoulders” to provide for her three daughters, Jessie (16), Stephanie (13) and Melanie (10).
Angela, a legal nurse consultant, took a second job working as a hospital nurse, and then took her financial planner’s advice to write down every amount she spent. She found the exercise to be empowering (“Part of getting a divorce was my decision to be more assertive and make my own choices,” she says) and surprising (“It’s amazing how much money three girls can spend on jeans!”).
Keeping an expense log helped Angela, 43, prioritize spending for “the little stuff.” The process also exemplifies an important but often overlooked tenet of fiscal responsibility: “Most people don’t have an income problem,” says Bill Russo, CFP, owner of Concord Financial Planners in Solon. “They have a spending problem.”
Take, for example, a couple that has a daily coffee-and-muffin-buying ritual: Each could each save $10 a day by nixing that “little” expense. Excluding weekends, they could save roughly $200 a month apiece, or $2,400 a year. If both are in their mid-30s and put the money into a pretax retirement account that earns a 12 percent annual return, they’d have a combined nest egg of more than $2.3 million by the time they’re 65. That’s a lot of lattes.
With her spending now in check, Angela began to focus on reallocating her monthly savings. Prior to the divorce and shortly afterward, she had maximized the amount earmarked to her 403(b), a nonprofit organization’s equivalent of an employee 401(k) plan. She also benefited from an employer match to that investment. Angela’s financial adviser complimented her on the move, but projected savings well in excess of her needs at retirement. Some of the money could be used for other purposes she valued, including her daughters’ education. She now invests $50 monthly for each of her children in Section 529 tax-deferred college savings plans, and, when she can, saves for their weddings.
“The big key for me is to set priorities and stick to them,” Angela says. “It’s hard this day and age, when everyone wants everything now. As a divorced woman, it’s important to me to show my kids where the money goes. When mom does well and gets a bonus, I talk about it. I want them to know the importance of hard work, and that money can’t buy happiness. You never feel like you have enough, so I’m teaching them to feel rich in their relationships and in themselves.”
The Bickums
Challenge: Transitioning to retirement
Strategy: Determine new cash flow and examine your investment strategy
Angela, a legal nurse consultant, took a second job working as a hospital nurse, and then took her financial planner’s advice to write down every amount she spent. She found the exercise to be empowering (“Part of getting a divorce was my decision to be more assertive and make my own choices,” she says) and surprising (“It’s amazing how much money three girls can spend on jeans!”).
Keeping an expense log helped Angela, 43, prioritize spending for “the little stuff.” The process also exemplifies an important but often overlooked tenet of fiscal responsibility: “Most people don’t have an income problem,” says Bill Russo, CFP, owner of Concord Financial Planners in Solon. “They have a spending problem.”
Take, for example, a couple that has a daily coffee-and-muffin-buying ritual: Each could each save $10 a day by nixing that “little” expense. Excluding weekends, they could save roughly $200 a month apiece, or $2,400 a year. If both are in their mid-30s and put the money into a pretax retirement account that earns a 12 percent annual return, they’d have a combined nest egg of more than $2.3 million by the time they’re 65. That’s a lot of lattes.
With her spending now in check, Angela began to focus on reallocating her monthly savings. Prior to the divorce and shortly afterward, she had maximized the amount earmarked to her 403(b), a nonprofit organization’s equivalent of an employee 401(k) plan. She also benefited from an employer match to that investment. Angela’s financial adviser complimented her on the move, but projected savings well in excess of her needs at retirement. Some of the money could be used for other purposes she valued, including her daughters’ education. She now invests $50 monthly for each of her children in Section 529 tax-deferred college savings plans, and, when she can, saves for their weddings.
“The big key for me is to set priorities and stick to them,” Angela says. “It’s hard this day and age, when everyone wants everything now. As a divorced woman, it’s important to me to show my kids where the money goes. When mom does well and gets a bonus, I talk about it. I want them to know the importance of hard work, and that money can’t buy happiness. You never feel like you have enough, so I’m teaching them to feel rich in their relationships and in themselves.”
The Bickums
Challenge: Transitioning to retirement
Strategy: Determine new cash flow and examine your investment strategy
Al Bickum heard the same message from several financial gurus: You need about 85 percent of your current income to stop working and maintain your lifestyle. “That scared me,” says Bickum, 64. “I knew there was no way we could pull that kind of money out of our retirement funds. So, was it OK to retire?”
Al had worked for Goodyear since college graduation, most recently serving as a leader in its environmental department, helping to prepare the sale of the firm’s $1.5 billion-plus engineered products business. His wife, Fran, 62, was a fifth-grade teacher in the Akron public school system.
Both approached their financial adviser, Jesse Hurst, with nervous energy. “It was almost like we needed permission,” recalls Fran, who knew she’d receive a higher pension if she worked until age 67. “When he showed us what our new income and expenses would be, down to the penny, we both looked at each other and knew it was time to retire.” Al left his job in December 2006 (but stayed on until August 2007 as a part-time adviser), and Fran retired after the 2006-’07 school year.
Hurst worked with the Bickums to project the couple’s new tax bracket and retirement expenses, including increased health insurance and traveling costs. Hurst, a partner of The Millennial Group in Akron, also analyzed Al’s and Fran’s investment-risk tolerance. When Al had invested in a 401(k) plan through his employer, he had selected a variety of mutual funds. Hurst suggested that Al change his investment mix to reduce the number of high-risk holdings, diversifying by size, industry and geography.
To achieve that end, some financial planners recommend “target funds,” which give investors a premixed portfolio that becomes more conservative as they near retirement age.
Another recommended tactic is “dollar cost averaging,” a technique designed to reduce market risk. For example, instead of investing $15,000 in a mutual fund in one lump sum, an investor can buy smaller amounts over a longer period of time. The technique provides insulation against changes in market price.
Upon deciding to retire, Al and Fran also had to make important, separate decisions about whether to take a lump sum or monthly pension from their retirement accounts. Hurst calculated the annual return each would need in order for the lump-sum option to be more fiscally sound than the consistent distribution. Al needed to earn a little more than 6 percent annually on his lump-sum amount for that choice to be better, so he took it. Because the couple wants to have a constant source of cash flow, Fran opted for the distribution annuity. (Hers includes an annual cost-of-living adjustment.)
Al and Fran, who have three married daughters in their 30s, had their Munroe Falls home built 12 years ago, and are considering paying off the mortgage. They’re also looking forward to traveling in the coming months.
“Our advice to people looking to improve their financial footing is to find an independent planner who takes time to undestand your specific needs and then crafts a plan to meet them,” Al says.
The Watsons
Challenge: Putting four kids through college
Strategy: Using home equity, while maximizing pretax accounts
Al had worked for Goodyear since college graduation, most recently serving as a leader in its environmental department, helping to prepare the sale of the firm’s $1.5 billion-plus engineered products business. His wife, Fran, 62, was a fifth-grade teacher in the Akron public school system.
Both approached their financial adviser, Jesse Hurst, with nervous energy. “It was almost like we needed permission,” recalls Fran, who knew she’d receive a higher pension if she worked until age 67. “When he showed us what our new income and expenses would be, down to the penny, we both looked at each other and knew it was time to retire.” Al left his job in December 2006 (but stayed on until August 2007 as a part-time adviser), and Fran retired after the 2006-’07 school year.
Hurst worked with the Bickums to project the couple’s new tax bracket and retirement expenses, including increased health insurance and traveling costs. Hurst, a partner of The Millennial Group in Akron, also analyzed Al’s and Fran’s investment-risk tolerance. When Al had invested in a 401(k) plan through his employer, he had selected a variety of mutual funds. Hurst suggested that Al change his investment mix to reduce the number of high-risk holdings, diversifying by size, industry and geography.
To achieve that end, some financial planners recommend “target funds,” which give investors a premixed portfolio that becomes more conservative as they near retirement age.
Another recommended tactic is “dollar cost averaging,” a technique designed to reduce market risk. For example, instead of investing $15,000 in a mutual fund in one lump sum, an investor can buy smaller amounts over a longer period of time. The technique provides insulation against changes in market price.
Upon deciding to retire, Al and Fran also had to make important, separate decisions about whether to take a lump sum or monthly pension from their retirement accounts. Hurst calculated the annual return each would need in order for the lump-sum option to be more fiscally sound than the consistent distribution. Al needed to earn a little more than 6 percent annually on his lump-sum amount for that choice to be better, so he took it. Because the couple wants to have a constant source of cash flow, Fran opted for the distribution annuity. (Hers includes an annual cost-of-living adjustment.)
Al and Fran, who have three married daughters in their 30s, had their Munroe Falls home built 12 years ago, and are considering paying off the mortgage. They’re also looking forward to traveling in the coming months.
“Our advice to people looking to improve their financial footing is to find an independent planner who takes time to undestand your specific needs and then crafts a plan to meet them,” Al says.
The Watsons
Challenge: Putting four kids through college
Strategy: Using home equity, while maximizing pretax accounts
The annual cost of a four-year private college education was around $4,000 when Bill and Heidi Watson graduated in 1978. But the couple faced a staggering price tag when it came time to send their youngest son, Josh, to college in 2002.
“I remember thinking, How in the world are we going to do this?” recalls Bill, 51. The cost for some of the schools Josh was looking at reached as high as $25,000 a year.
And, he was just one of the couple’s four children: Their oldest son, Dave, had just graduated from Ohio Northern, their second son, Steve, was a senior at Mount Union, and their second-youngest son, Tim, was a sophomore at the University of Dayton.
“With four kids in college in a short period, and without government assistance, it’s been pretty daunting for us,” Bill says.
This year, the average annual cost for a four-year college education is $23,712 for private schools and $6,185 for public institutions — up more than 6 percent from last year in both cases, according to “Trends in College Pricing 2007,” a report released by College Board, an association of 5,200 colleges and universities.
So how did the Watsons do it and still guard their financial future? Bill, a mechanical engineer, is a smart saver. He has invested around 8 percent of every dollar he’s earned in a 401(k) pretax retirement account. He also took advantage of a previous employer’s pension plan. Contributing the maximum allowable ($15,000 per year for Bill) to such accounts maximizes tax savings.
If you’re in the 28-percent tax bracket, for every $100 you earn, you pay roughly $28 in federal taxes, $7 to $8 in Social Security taxes and $6 to $9 in state and local taxes, leaving about $60 to invest. But money in a pretax account isn’t subject to as many deductions (though you usually can’t take it out until retirement without a penalty). For example, a 30-year-old in that tax bracket who invests $100 a month in a tax-deferred account that grows 9 percent annually, ends up with around $295,000 by retirement. With a taxable account, the result may be more than $100,000 less.
While “pay yourself first” is a popular mantra, most people do the opposite, says Bill Russo, CFP, owner of Concord Financial Planners in Solon. “If you can’t see it, you’re much less likely to spend it,” he adds.
But Bill and Heidi Watson didn’t tap into their 401(k) retirement nest egg to pay for their sons’ college expenses. They took out a variable-rate equity line of credit on their Solon home. Heidi also returned to work as a registered nurse after spending 25 years as a stay-at-home mom.
Now, each of the Watsons’ sons will owe only $5,000 upon graduation, and the couple’s home equity line should be paid off by January 2010.
“We can’t wait for that day, when we’ll have more expendable income for fun together,” says Heidi. Bill aims to retire in 11 years, at age 62, and wants to relocate to “Charlotte, Charlotte or Charlotte.” Quips his wife: “I like Ohio, Ohio or Ohio.”
The Joneses
Challenge: Organizing finances before and after a death
Strategy: Open communication, plus trust in an expert
“I remember thinking, How in the world are we going to do this?” recalls Bill, 51. The cost for some of the schools Josh was looking at reached as high as $25,000 a year.
And, he was just one of the couple’s four children: Their oldest son, Dave, had just graduated from Ohio Northern, their second son, Steve, was a senior at Mount Union, and their second-youngest son, Tim, was a sophomore at the University of Dayton.
“With four kids in college in a short period, and without government assistance, it’s been pretty daunting for us,” Bill says.
This year, the average annual cost for a four-year college education is $23,712 for private schools and $6,185 for public institutions — up more than 6 percent from last year in both cases, according to “Trends in College Pricing 2007,” a report released by College Board, an association of 5,200 colleges and universities.
So how did the Watsons do it and still guard their financial future? Bill, a mechanical engineer, is a smart saver. He has invested around 8 percent of every dollar he’s earned in a 401(k) pretax retirement account. He also took advantage of a previous employer’s pension plan. Contributing the maximum allowable ($15,000 per year for Bill) to such accounts maximizes tax savings.
If you’re in the 28-percent tax bracket, for every $100 you earn, you pay roughly $28 in federal taxes, $7 to $8 in Social Security taxes and $6 to $9 in state and local taxes, leaving about $60 to invest. But money in a pretax account isn’t subject to as many deductions (though you usually can’t take it out until retirement without a penalty). For example, a 30-year-old in that tax bracket who invests $100 a month in a tax-deferred account that grows 9 percent annually, ends up with around $295,000 by retirement. With a taxable account, the result may be more than $100,000 less.
While “pay yourself first” is a popular mantra, most people do the opposite, says Bill Russo, CFP, owner of Concord Financial Planners in Solon. “If you can’t see it, you’re much less likely to spend it,” he adds.
But Bill and Heidi Watson didn’t tap into their 401(k) retirement nest egg to pay for their sons’ college expenses. They took out a variable-rate equity line of credit on their Solon home. Heidi also returned to work as a registered nurse after spending 25 years as a stay-at-home mom.
Now, each of the Watsons’ sons will owe only $5,000 upon graduation, and the couple’s home equity line should be paid off by January 2010.
“We can’t wait for that day, when we’ll have more expendable income for fun together,” says Heidi. Bill aims to retire in 11 years, at age 62, and wants to relocate to “Charlotte, Charlotte or Charlotte.” Quips his wife: “I like Ohio, Ohio or Ohio.”
The Joneses
Challenge: Organizing finances before and after a death
Strategy: Open communication, plus trust in an expert
When Harrison Jones was diagnosed with Stage IV lung cancer in September 2006, doctors told him chemotherapy would prolong his life only a few months. The difficult time was made tougher by the fact he had always kept the family’s financial matters close to the vest. Like many spouses of her generation, Harrison’s wife, Linda, didn’t know exactly how much money they had.
For the entire family, last winter was a mix of pain and pragmatism. “It was obviously a huge struggle for us emotionally while my dad was suffering, but at the same time, his main concern was his wife’s well-being when he was gone,” says Kelly Craig, Harrison’s 41-year-old daughter.
Kelly and her husband, Bob, sought help from their financial planner, Dennis Barba Jr. Ph.D., managing partner of The Oxford Group of Raymond James & Associates. He had helped the couple with their retirement portfolio, and Kelly wanted his insight on organizing her father’s estate so her mother would be financially secure.
“Every day seemed like a new barrage of questions that went beyond just making sure Mom had access to the money,” Kelly recalls. What needed to be titled? Who was the named beneficiary to each investment product? What would Linda have to pay taxes on once her husband passed away? “It’s hard to turn from emotions to cold, hard questions, but it’s probably the most important thing we did.”
With her dad’s help, Kelly sifted through folders and gathered quarterly statements that detailed his financial holdings. Linda, 63, wasn’t documented as the beneficiary on several of them, so Barba made sure those oversights were corrected. Harrison also ensured that Kelly and her brother received power of attorney, so they could make decisions on his behalf just prior to his June 2007 passing.
“When we uncovered the cloak of secrecy, we realized Dad was going to leave Mom in a pretty good position,” Kelly says. Barba collaborated with the family to set a new budget that accounted for Linda’s monthly Social Security income (about $1,400) and monthly expenses. The biggest change — and a big problem for many non-working widows and widowers — was the new cost of private health insurance, which will cost $1,500 a month until Linda turns 65 in June.
Barba also determined how much risk Linda should assume with her fiscal portfolio, pinpointing 7 percent as the target annual return rate necessary for Linda to maintain her lifestyle without the need to dip into the principal. Many financial experts suggest this rule of thumb when determining how to allocate a portfolio: Take your age and subtract it from 110. That number is the percentage of assets that should go into equities. The remainder should move into bonds or other fixed-income investments.
Following her husband’s death, Linda wanted to move from Gainesville, Fla., to the Raleigh, N.C., area to be closer to Kelly’s brother. Barba helped her determine an affordable mortgage.
Shortly before moving to North Carolina, Linda found a surprise in an unchecked drawer: Harrison had term life insurance no one had known about. That sum helped her pay for the move. “It’s been a hard year,” Kelly says. “But she’s beginning to enjoy her own house and new adventures.”
The Expert’s Take
Ted Sadar, owner of Sadar Financial Management, offers this insight:
For the entire family, last winter was a mix of pain and pragmatism. “It was obviously a huge struggle for us emotionally while my dad was suffering, but at the same time, his main concern was his wife’s well-being when he was gone,” says Kelly Craig, Harrison’s 41-year-old daughter.
Kelly and her husband, Bob, sought help from their financial planner, Dennis Barba Jr. Ph.D., managing partner of The Oxford Group of Raymond James & Associates. He had helped the couple with their retirement portfolio, and Kelly wanted his insight on organizing her father’s estate so her mother would be financially secure.
“Every day seemed like a new barrage of questions that went beyond just making sure Mom had access to the money,” Kelly recalls. What needed to be titled? Who was the named beneficiary to each investment product? What would Linda have to pay taxes on once her husband passed away? “It’s hard to turn from emotions to cold, hard questions, but it’s probably the most important thing we did.”
With her dad’s help, Kelly sifted through folders and gathered quarterly statements that detailed his financial holdings. Linda, 63, wasn’t documented as the beneficiary on several of them, so Barba made sure those oversights were corrected. Harrison also ensured that Kelly and her brother received power of attorney, so they could make decisions on his behalf just prior to his June 2007 passing.
“When we uncovered the cloak of secrecy, we realized Dad was going to leave Mom in a pretty good position,” Kelly says. Barba collaborated with the family to set a new budget that accounted for Linda’s monthly Social Security income (about $1,400) and monthly expenses. The biggest change — and a big problem for many non-working widows and widowers — was the new cost of private health insurance, which will cost $1,500 a month until Linda turns 65 in June.
Barba also determined how much risk Linda should assume with her fiscal portfolio, pinpointing 7 percent as the target annual return rate necessary for Linda to maintain her lifestyle without the need to dip into the principal. Many financial experts suggest this rule of thumb when determining how to allocate a portfolio: Take your age and subtract it from 110. That number is the percentage of assets that should go into equities. The remainder should move into bonds or other fixed-income investments.
Following her husband’s death, Linda wanted to move from Gainesville, Fla., to the Raleigh, N.C., area to be closer to Kelly’s brother. Barba helped her determine an affordable mortgage.
Shortly before moving to North Carolina, Linda found a surprise in an unchecked drawer: Harrison had term life insurance no one had known about. That sum helped her pay for the move. “It’s been a hard year,” Kelly says. “But she’s beginning to enjoy her own house and new adventures.”
The Expert’s Take
Ted Sadar, owner of Sadar Financial Management, offers this insight:
• Talk about risk tolerance.
“John is a bit more conservative by nature than Kelly, but they do a great job of talking about it and working toward common goals,” he says. “They both know what they’re trying to accomplish.”
• Diversify your portfolio.
Life expectancy is increasing, so many 30-somethings will live into their 90s or longer. The investment vehicles you choose have to outrun inflation and taxes. That’s why asset allocation is critical. Everyone should own some stocks, bonds and cash.
The Expert’s Take
Jesse Hurst, CFP, a partner of The Millennial Group in Akron, offers these tips:
• Ignore the 70 percent to 85 percent stipulation.
Some people can live comfortable on less than 70 percent of their pre-retirement income. “The big issue for folks five years before and after retirement is assurance and peace of mind: Do I have enough fuel in the tank to get me to where we need to go financially?” Hurst says.
• Know the gap between your sources of income and your monthly needs.
If you need $5,100 a month to maintain your standard of living, and you’re going to receive $4,100 in income, $1,000 is the gap that must be filled through things like investment withdraws. Hurst suggests keeping withdraw rates to 4 to 5 percent of the balance or less.
• Realize that health care is the wildcard.
Says Hurst: “I could name 10 or 12 clients between the ages of 57 and 62 who might be able to retire today, but have no idea how much they’re going to have to pay in health care costs for the next few years.”
The Expert’s Take
Bill Russo, owner of Concord Financial Planners in Solon, offers this guidance:
• Create an expense log for a month.
Track where your money is really going. Doing so puts you in a position to make informed trade-off decisions. “You’ll notice how quickly ‘little expenses’ add up,” Russo says. “Determine where you can make cuts, realizing you probably want three to six months’ worth of living expenses for an emergency fund, or a target number for your retirement.”
• Don’t be swayed by perceived needs.
“People laugh at the generation that saved money in cookie jars and envelopes, but they didn’t have credit problems,” Russo points out. “The marketing machine is so heavy now, we’re told we need more and we don’t want to wait. That’s causing financial planning basics to be swept aside.”
Before deciding to retire, Al and Fran Bickum examined their expenses and investment strategies with a financial planner. “It was almost like we needed permission,” Fran recalls.
As a single mom to daughters (left to right) Melanie, Stephanie and Jessica, Angela Solano writes down everything her family spends.
The Expert’s Take
Bill Russo, owner of Concord Financial Planners in Solon, offers this insight:
• Let grandparents help.
By having a grandparent open a Section 529 tax-deferred college savings plan, parents don’t have to count those assets in financial-aid applications. Also, the grandparents get the tax benefits of reducing the money in their estate.
• Pay down higher interest rates first.
If you have a credit card with a 20-percent interest rate and a student loan with a 5-percent rate, put as much as you can toward the credit card balance. “The strategy is smart if you don’t have a spending problem,” Russo says.
The Expert’s Take
Dennis Barba Jr., Ph.D., managing partner of The Oxford Group of Raymond James & Associates, offers this advice:
• Place your will or trust documents in an easy-to-find location.
The Expert’s Take
Dennis Barba Jr., Ph.D., managing partner of The Oxford Group of Raymond James & Associates, offers this advice:
• Place your will or trust documents in an easy-to-find location.
Make sure other family members know where they are. (The same goes for other important papers.) Also, make sure your attorney has a copy of the documents on file.
• Encourage the family to communicate about financial goals and assets.
A financial planner can’t talk to clients about money unless the clients know what they want their money to accomplish.
Smart saving and a line of credit helped Bill and Heidi Watson put their four boys through college.
Kelly Craig helped her terminally ill father ensure his wife would be taken care of when he was gone.
