Your Children or Your Retirement

Posted on August 29th, 2011 in Educational Expenses, Financial Abundance, Health Care, Newsletter Articles, Retirement Planning by wayne

One of the greatest blessings of my life was to be the father of two children.  When we become parents, it is understood that we are taking on a large, new financial responsibility.  Most young parents believe that their financial responsibility will end when their children graduate from college.  Many parents of grown children have found that these expenses can continue well past college graduation.

Many people who are approaching retirement, provide financial support for their grown children, even when doing so places their retirement at risk.  Regardless of your child’s age, you can decrease and eventually break your children’s financial co-dependence.  Here are a few approaches to consider:

  1. Agree that you will only pay for in state college tuition.  When our children were young, my wife and I determined that Colorado had excellent state colleges.  When our children began to consider their college options, they were allowed to consider all colleges.  Our children knew that we would pay for any state supported college in Colorado. If they wanted to attend a more expensive school, they would be responsible for the increased costs.  This approach allowed our children to share the financial responsibility for their college choice.
  2. While our children both chose state supported colleges, had they chosen more costly schools, they would likely have required student loans.  If your child requires a student loan, keep the loan only in the student’s name.  Even if you choose to help your child pay this loan after college, by keeping the loan in your child’s name, you avoid personal responsibility for a loan that would always be with you, even if you or your child declared bankruptcy.
  3. Never co-sign any financial obligation with your child.  If you agree to co-sign a lease, a car loan, a mortgage or any other financial instrument, you are effectively taking 100% ownership of the obligation.  If the financial obligation is something that you wish to support, such as a mortgage, take the mortgage out in your own name and have a separate agreement with your child.  This gives you complete control over the property should things not work out as planned.
  4. If your child requires on-going financial support that you are willing to provide, pay their bills directly to the party to which they are owed.  This will assure that your financial support is going to where it is intended.
  5. Be sure that your grown child has medical insurance.  Many young people do not see the need for medical insurance.  If your grown child can no longer be on your medical insurance policy and you are financially able to help them, use the first dollars of your support to assure that they have adequate medical insurance.
  6. If you are supporting your grown child, develop a mutually agreed upon plan to terminate this support.  While the plan may require months to complete, you are demonstrating to your child your faith in their ability to succeed financially.  Your faith in your child’s ability to succeed financially will be one of the best gifts that you can ever give.
  7. If required, allow your grown child to fail financially.  It is human nature to learn more from failure than success.  While it is extremely difficult to see grown children struggle, by letting go and allowing them to determine how to get out of a financial jam, we allow them to grow as adults and we show our faith in their ability to solve their financial dilemma.

Parents wish for their children to be financially secure.  As counterintuitive as it may seem, one of the best ways to assure this is to let our grown children have the responsibility of taking care of their own financial well being.  While some critical financial support is often required, showing our faith in our children’s ability to be responsible for their own financial health is a gift to both your children and your retirement.

Take Control of Your Financial Future

Posted on August 29th, 2011 in Financial Abundance, Investments, Newsletter Articles, Retirement Planning, Risk Management, Taxes by wayne

The economy, government spending and debt, unemployment, housing foreclosures and our banking system all contribute to a fear of the financial future.  These fears are all outside of our control.  However, we can control many decisions related to our own financial future.

Financial Abundance Guide (available free at www.finabguide.com) identifies many areas of personal finance that can be controlled.  I also developed the Seven Steps to Financial Abundance to help people reach their financial goals.  With so much fear of the financial future, following the seven steps can help increase our power to control our financial future.

“Spend less than you earn,” is the required first step.  Over a 40 year career (age 25 to age 65), assume that your average income is $80,000 (in 2011 dollars) and the annualized investment real rate of return is 5%.  Saving 10% of income ($8K) each year will produce savings of over $1 million (in 2011) dollars at age 65.

By “maximizing your financial resources” (step 2) , savings can be increased with no negative impact on spending.  If a company offers a 4% of salary match with their 401(k) plan, by contributing at least 4% of salary, this amount is matched by the company. Using the previous example, annual savings are increased from $8,000 to $11,200, increasing the savings available at age 65 to almost $1.5 million.

“Minimizing your taxes” (step 3), also provides additional savings with no impact on spending.   Financial Abundance Guide provides many tax savings techniques available to people of all income levels.  One example is a spousal IRA, allowing a non working spouse to contribute $5,000 per year to an IRA.  For a couple paying 25% in federal taxes and a 5% state income tax, a $5,000 IRA contribution would yield $1,500 in annual tax savings.  Continuing with our example, the additional $1,500 in annual tax savings would  provide almost $1.7 million in 2001 dollars by age 65.

“Managing your investments” (step 4), can significantly increase investment returns.  This may require the help of an investment professional.  If so, carefully choose an investment advisor and be wary of anyone providing “free” advice.  A “free” advisor must be compensated through commissions on the investment products they sell.  Fee only advisors are compensated by the fees they charge to manage investments.  Continuing the above example, if the real rate of investment return is increase by only 0.5%, the couple would have almost $1.9 million at age 65.

Using the simplistic assumption that a couple, at age 65, can withdraw at least 4% of their investments each year and never run out of money, $76K (in 2011 dollars) can be withdrawn each year throughout retirement.  Since their previous annual expenses were $72K, with $8K per year in savings, even with no Social Security or other retirement benefits, our couple can more than maintain their lifestyle throughout retirement.

Fear of the unknown often produces a sense of financial scarcity.  “Protecting your financial resources” (step 5), through appropriate, lower cost insurance products can help keep this fear at bay.   An insurance product that is often overlooked is a $1 – $2 million umbrella liability policy.   In our litigious society, one may be sued because someone was hurt on their property or by a car driven by a family member.  For very little money, peace of mind can be secured by adding an umbrella liability policy to your auto or home insurance policy.

Financial planning helps “control your personal finances” (step 6). There are many available resources to help you produce you own financial plan.  If you have neither the time nor interest in financial planning, engage a fee only Certified Financial Planner (CFP®)  who will listen to your concerns and provide a comprehensive plan that enumerates the options available to meet your financial goals.  A financial plan helps increase control over personal finances.  Planning will reduce the fear of scarcity, providing more financial security on the path toward financial abundance.

“Have faith in continued abundance” is the seventh step. Implementing the first six steps addresses what you can control in your personal finances.   Faith that financial abundance will continue helps eliminate the doubts and fears of the unknown often caused by events over which you have no control.

Financial abundance is a lifetime pursuit.  There will always be ups and downs in the economy and markets.  By applying the seven steps and seeking appropriate outside support as required, you will be on the pathway toward financial abundance.