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April 22nd, 2012
by Eve Kaplan, CFP(R) Practitioner
How do you decide if it makes sense to leave a job and become a stay-at-home parent? As a financial planner, I approach this topic strictly from the financial standpoint – I’m NOT saying it’s better be a stay-at-home Mom and I’m NOT saying it’s better to use child care and go to work.
For the record, I’ve been both a stay-at-home Mom and a working parent. Any parent will tell you being a stay-at-home IS a job – it’s just not a paid job.
What prompts me to look at this topic is a recent CNN Money article (4/18/12) titled “Moms: “I can’t afford to work.”
The article catalogues the rising cost of child care that eats into – or even exceeds – the take-home pay of working parents (in this case, a working mother). The Bureau of Statistics data underscore some of the underlying issues for stay-at-home Moms:
a) Although women exceed men in terms of educational attainment, their average income is $35,776/year.
b) $35,776/year is nearly 20% less than the average income earned by men.
Rising child care expenses present a heavy drag on family finances, but the CNN Money article overly simplifies the
decision one mother made (a Mrs. Hwang) because it merely compares the cost of child care for her children vs. the after-tax income she could otherwise earn. Clearly there are many ways to value of a job — and after-tax pay is only one of them.
Mrs. Hwang is a good stand-in for any stay-at-home parent. She related to CNN that her public school teacher salary
was $30,000/year after tax. She has 2 children and the cost of care for them is a relatively “modest” $18,000/year (the article notes she lives in Virginia, which has some of the lowest child care expenses in the nation). Mrs. Hwang felt it wasn’t worth it to continue work, although her husband can’t earn enough for them to live comfortably.
For the sake of argument, let’s say her child care expenses total $30,000 per year – the same as her after-tax take-home salary. And let’s assume Mrs. Hwang elects not to return to work, even after her children leave for college. On that basis, let’s compare ALL
components of her income to make a fair analysis of the “cost” of being a stay-at-home Mom – not just a flat comparison of a) child care costs vs b) after-tax salary:
1) As a public school teacher, each year of teaching accrues toward a retirement pension that pays Mrs. Hwang from retirement to the end of her life. Let’s assume her pension does not inflate once retirement commences (this is ine line with Gov Christie’s decision to freeze teacher and administrator pensions for decades to come). If Mrs. Hwang is 38 and chose to work to age 65+, she can accrue a lifetime pension that I calculate pays her at least $40,000/year (after tax) from 2039 (age 65) to the end of her life. This is a conservativeestimate based upon projected income levels and pension accrual. The value of this estimated
pension from age 65 to age 92 is $1,080,000 in 2039 dollars, or $554,000 in 2012 dollars.
2) Mrs. Hwang’s future social security payments would be higher if she continues to work since income generation drives projected social security benefits. After consulting with a number of specialists, potential “game changers” in social security render
calculations too tentative. However, one projection I ran indicated Mrs. Hwang could receive approx. $18,600 per year in retirement (agg 67 to the end of life) if she works, but only half that amount per year if she remains a stay-at-home parent (note: this does not include some build up in credits for work done from e.g. age 30-38). Since social security works like an inflating
fixed annuity, missed dollars obviously have an impact on Mrs. Hwang’s cash flow through her projected 25+ years of retirement.
3) Mrs. Hwang’s presumably has medical coverage through her husband’s job. It’s possible, however, that medical coverage through school would cost significantly less – possibly $6,000/year less (2012 dollars). Again, I use public schools teachers in NJ as an example since teachers here still benefit from generous subsidies for medical coverage.
4) Mrs. Hwang will miss access to a tax-deferred 403b savings plan through work. It’s not likely she has a match for her deferred savings, however, and it IS possible she could defer $5,000 per year in a spousal IRA, so the cost/benefit calculation here is a wash.
5) Mrs. Hwang will forego e.g. 1x salary life insurance available through work by staying at home. If she’s in good health, that benefit is worth at least $100/year.
6) Since Mrs. Hwang is a school teacher who presumably does not work in the summer, it’s possible her child care costs
may be less than a working parent who has the standard 2-3 weeks of vacation/year.
What is the effective value of work benefits Mrs. Hwang is giving up, apart from her income? In current 2012 dollars, it easily exceeds $700,000 over her lifetime. It’s possible the value Mrs. Hwang and her family assign to staying home with her children is “priceless,” but it’s also possible the Hwangs aren’t aware of the long-term cost of her decision to leave work. Either
way, the “cost”calculation of leaving work must include many benefits that aren’t immediately apparent when looking at take-home pay alone and comparing it with child care costs. Of course we haven’t discussed working parents who
work awhile, stop to raise children, and return to work thereafter. And we’re not addressing the benefits of staying “current” in a competitive work landscape. Like other decisions, there are both emotional and financial costs and benefits.
What’s the right answer for you and your family? I posit that a financial advisor provides meaningful input by running numbers to calculate the effective cost (or savings) if you decide to become a stay-at-home parent or if you’re thinking about returning to work.
At the very least, the cost/savings equation needs to include many more elements than just a flat comparison of “child care costs” vs. “take-home salary.” A good advisor can help you make a more informed decisions so you and your family avoid outliving your assets.
Copyright (C) 2012 by Eve Kaplan
Tags: cost/benefit of working, financial planning for women, stay-at-home dads, stay-at-home moms, stay-at-home parents
Posted in Fee-Only Financial Planning, Financial Planning, Financial Planning for Women, Retirement Planning | No Comments »
April 9th, 2012
A financial plan is like a long-distance car trip. But with couples, more than one person is behind the wheel. They don’t always agree on what course to follow.
That is no reason to put off making a plan. If there is no plan, they risk frustration and failure to fulfill dreams. There is no worse sentiment than regret. The question is: What kind of future do you really want for yourself and the people in your life that are most important to you?
An April 9 Wall Street Journal article (“He Wants to Retire…but She Doesn’t”), cites a study by Fidelity Investments to highlight the problems of making a plan. Couples disagree on when to retire (62%), whether to keep working in retirement (47%) and on lifestyle expectations (33%).
A plan enables a couple to evaluate the costs of various wish lists and select strategies that satisfy both husbands and wives. A neutral party, their financial advisor, provides the forum for an open and non-judgmental discussion, then weighs in with numbers to aid the decision making.
Like a car trip, your financial life is a journey that needs to be navigated carefully. After a financial advisor checks your entire car to make sure it will withstand the journey, the advisor creates a GPS system for you to help you stay on track.
Here’s a specific example, gleaned from hundreds of clients I’ve worked with from my office in New Jersey. Judy and Bill are in their late 50s, have grown children and are looking to retire in the next 10 years. They’ve never worked with a financial advisor before. They disagree on retirement expectations. When they visit me, we have an open discussion.
Bill dislikes his job and wants to retire “yesterday.” He’s willing to work to age 63, but wants to winter in a warmer climate. Judy enjoys work and wants to continue her current job into her late 60s, assuming her health and employer permit it. After retirement, she may consider spending part of a year in a warmer climate if it makes financial sense. Judy and Bill agree on other goals – such as the amount of money they’d like to spend on their daughter’s wedding, their annual travel budget and the need for long-term care insurance.
Can they afford to allow Bill to retire at 63, and to purchase a place in a warm climate? Or does it make sense to rent? How do they negotiate emotionally and financially negotiate staying in New Jersey if Judy wants to retire after Bill?
A good financial plan creates decision trees that show Judy and Bill that some preferences, such as buying a condo in a warm place now, probably aren’t financially prudent. A plan also helps Judy and Bill avoid costly decisions they may regret later. For example, how should Bill structure his pension payout to make sure Judy receives something if he dies prematurely? Should they consider long-term care insurance? If so, what is the best kind? What kind of estate planning should they do?
A good financial plan will bend to Judy and Bill’s wishes, but guide them toward choices that have the best possible financial outcome. Their destination on their financial road map is making it to the end, comfortably, with money to spare.
My role is to give them the best road trip instructions possible, consider the right fuel (restructure their investments), offer estate planning advice, minimize taxes and consider insurance alternatives. I do this by consulting trusted professionals I work with, like an insurance agent.
In the end, it’s all about making sure you design a trip that makes sense – and gets you safely to your destination.
Copyright © 2012 by Eve Kaplan
Tags: couples and planning, fee only financial planning, financial advice, seeking financial advice, the role of a financial planner
Posted in Fee-Only Financial Planning, Financial Planning, Retirement Planning | No Comments »
January 15th, 2012
Do your New Year’s Resolutions include “losing weight” and “getting more exercise”? Do they also include “better financial health?” They should! Getting a handle on financial health can be challenging, however.. Here are 2 things to consider:
1. Join my free January workshop to review steps toward financial health. This workshop will be held on Wednesday, January 25 at 7:30 pm at the Berkeley Heights Public Library.
2. Decide if you can get through these “financial health” steps on your own (a minority of folks) or if you need professional support.
Most folks can’t necessarily diagnose and treat their own medical conditions – and the same applies to financial planning.
Here’s an outline of the 12 Step Approach to Financial Health in 2012:
Step 1 (January): “Paper Chase”
• Create neat, organized files for your insurance, estate planning documents (if you have them), investments (after-tax and tax-deferred), etc.
Step 2 (February): “Location, Location, Location”
• Consolidate your brokerage accounts (12 is not better than 2).
• Consolidate investment accounts by identifying overlapping/redundant investments. I’ll review some resources (e.g. www.morningstar.com) to help in this area.
Step 3 (March): “Follow the Money”
• Add up all monthly or annual income sources (earned income, Social Security/pensions, other income), then deduct all expenses
• Are you in the Red? Black? Did you include mandatory savings if you’re not yet retired?
Step 4 (April): “Outliving Assets?”
• Add up your assets (property, investments, collectibles)
• Add up your current and future liabilities (mortgages, credit card debt, future obligations [e.g. college, possible support to other family members])
• Do you know if your net worth is sufficient to generate decades of retirement?
Step 5 (May): “Be Credit-Worthy”
• Track your annual credit score
• Consolidate and pay down CC debt in a way that makes sense
Step 6 (June): “Be Tax Savvy”
• Minimize taxes on investments by holding more of some investments in tax-deferred accounts (e.g. real estate, some bonds, commodities)
• Tax harvest before each year end to offset investment gains
Step 7 (July): “Insurance Wrap-Up”
• Do you have the best policies (life, disability, long-term care)to cover what you need – but don’t cost an arm and a leg?
• Is your family adequately protected from the risk of your unexpected illness or death?
Step 8 (August): “Sound Retirement Investing”
• Understand and utilize your employer retirement plan
• Roll up and consolidate plans from old employers
• How to utilize your retirement plans before and during retirement
Step 9 (September): “Investment Smarts”
• Know the A, B and Cs of mutual fund investing (different types of commissions)
• Retain more of your hard-earned money by paying a broker less (no more A, B and C charges!)
• Understand simply portfolio diversification techniques
Step 10 (October): “Estate Planning”
• What are the essential estate documents you need?
• How often should your estate documents be revised?
Step 11 (November): “Reality Check List”
• Has your financial health improved by taking these steps? Or did you fall off the wagon half-way through?
Step 12 (December): “Putting It All Together”
• Match realistic expectations with results
• Can you go it alone or do you need professional help? How do you find the right advisor for you?
Realistically, the majority of people cannot execute these steps alone. Review this list and see if you fall into that majority group. If you do, consider work with a Fee-Only (no products sold) advisor who will guide you through these steps in an objective manner that doesn’t mix advice with product sales. The right Fee-Only planner will access the situation, provide solutions to close planning gaps and hold you accountable to execute necessary changes.
Copyright © 2012 by Eve Kaplan
Tags: budgeting, cash flow, estate planning, insurance, retirement planning
Posted in Fee-Only Financial Planning, Fiduciary Standards in Financial Planning, Financial Planning, Investments, Retirement Planning | No Comments »
December 13th, 2011
How much money can you safely withdraw from your investments once you retire?
This is a subject of wide debate in the financial planning world as our country’s 78 million baby boomers start turning 65 this year. This “withdrawal rate” simply refers to how much you can tap from your investment assets to avoid running out of money before you die. The approach is designed to allow you to withdraw money each year while leaving your principal intact.
For example, if you start with $1,000,000 at retirement and withdraw 4% per year ($40,000), you skim a $40,000 annual gain off the top of your $1 million investment portfolio and always have the $1,000,000 principal until the end of your life. This implies the $1 million keeps growing by 4.2% each year (you need more than a 4% increase to return to $1 million).
Being able to live off interest while retaining your $1 million principal is valuable even if the purchasing power of your principal declines each year with inflation. In other words, your $1 million initial retirement account might only be worth the equivalent of $300,000 after 30 years, but having the equivalent of $300,000 is still a great financial cushion to help keep you from running out of money.
Unfortunately, we don’t live in the predictable world that facilitates an automatic 4% withdrawal rate because markets move up and down, tax rates change, your financial needs change and investments sometimes disappoint. You no longer can simply set the dial at e.g. “4% withdrawal per year” and be assured you won’t run out of money in 30 years.
Here are some things to consider, based upon recent research:
1. People are living longer and longer. It’s not overkill to assume you easily can live another 30 years if you retire at age 65.
2. You can’t control where markets will land the year you retire and begin tapping your investment nest egg. If you had a few bad years before you turn 65, you might start retirement with $900,000 instead of the $1 million you intended. How much you have at retirement also depends upon your portfolio mix in the years leading up to retirement. You should consult with a financial planner or investment specialist to determine your optimal mix.
3. Once you retire, you need to adjust your withdrawal rate “as you go” – depending upon how markets did the previous 3 years. The Wall Street Journal refers to this strategy as “the accordian strategy.” If the market hits a bear market bottom (note: this may not always be obvious), you trim your withdrawal amount by 25% for the coming 3 years. Michael Kitces, a planning strategist, recommends tracking the S&P 500 P/E (price earnings ratio) to determine if the market is overvalued, fairly valued or undervalued. On that basis, he increases or decreases recommended withdrawal rates within a 4.5% to 5.5% range. This approach has been effective in recent years when tested with a 60% stocks, 40% bonds portfolio.
4. Some specialists recommend an even lower withdrawal rate (as low as 2.5% for a moderately conservative 40% stocks/60% bonds portfolio). This means you withdraw $25,000 per year (2.5%) instead of $40,000 per year (4%). Of course we’re talking about pre-tax amounts.
5. One strategy at retirement is to set aside 3 years of cash reserves (what you otherwise would draw from your investments) so you always can suspend your annual withdrawals from your $1 million if markets hit the skids.
We haven’t discussed the fact that you need to pay taxes on what you withdraw (ordinary income tax rates if it comes from an IRA, or capital gains tax if funds come from an after-tax account). You may need significant other sources of income (social security, pensions, savings) to fund retirement. And then there’s the corrosive power of inflation; you need to withdraw more and more each year in order to keep pace with purchasing power. Finally, our example of $1 million doesn’t go very far toward covering retirement in more expensive parts of the country – you may need multiples of $1 million in addition to social security and a pension (if you’re lucky enough to have one).
As you can see, determining your ideal withdrawal rate is no trivial matter. If you’re calculations indicate you may be coming up “short,” alternatives include retiring later, adjusting your portfolio over time or spending less in retirement. It’s best to seek professional advice if you have doubts or concerns!
Copyright © 2011 by Eve Kaplan
Tags: withdrawal rates in retirement
Posted in Financial Planning, Investing, Investments, Retirement Planning | No Comments »
September 27th, 2011
Are you Retirement-Ready? Take These 3 Critical Steps
By Eve Kaplan, CFP® Practitioner
Like everything else in life, retirement can creep up on you – whether you’re prepared for it or not. It’s wonderful to contemplate what you can do with all that extra free time, how to stay healthy, etc…..but many of you put off the “roll up your sleeves, look at the numbers” part of retirement. Why? You either underestimate how much you need, you don’t know how to calculate it and/or you fail to go to a financial planner for help. Finally, some of you stick your heads in the sand, hoping problems will go away. Establishing your preparedness for retirement is critical since you don’t want to outlive your assets. So far I haven’t met anyone who wants to rely on friends and family for a bail out!
How acute is the lack of retirement preparedness? Very. A recent survey by HRconsulting firm Aon Hewitt says 4 out of 5 Americans are not adequately prepared to meet their needs in retirement. The average worker needs 11x his/her final pay in retirement to meet retirement needs (note: this includes social security). Unfortunately, the average pre-retiree socking away money in defined contribution plans (e.g. 401(k) or 403(b) plans) has far less. Recent market volatility is increasing this gap. Another worrisome trend is the rising number of pre-retirees who have suspended 401(k) contributions and/or no longer receive an employer match.
Esssentially, there’s a mismatch between 1) sources of income and 2) how much folks need in retirement. The resulting gap is the problem. Let’s take a simple look at each area:
Step 1 -Sources of Income: A simple retirement planning is the 3-legged stool. The 3-legged stool refers to the 3 major sources of retirement income: 1) your regular savings 2) your pension (if you have one) – or your 401(k) & other tax-deferred savings plan and 3) social security. You have control over all 3 areas – including how much social security you receive!
1) How much do you save in after-tax and tax-deferred accounts? Is it the right amount and allocation, given your risk tolerance, savings amounts and investment targets?
2) Do you plan on taking social security at age 70 (recommended) or will you settle for a much lower annual amount if you rush to take benefits at 62 or 65/66?
Finally – are you planning on retiring at age 60? 65? 70? Phase retirement in steps, if you can? If you end up living to 95 (a growing possibility), will you have enough money coming in each month?
Step 2 – How Much You Need in Retirement: Here’s the other side of the ledger – the amount you need each month or year in retirement, including covering rising medical expenses.
1) Are your financial goals realistic – given your 3-legged stool? Goals include living expenses, car purchases, travel, insurance and medical.
2) Can you scale back some of these areas – if needed – to close the gap with your 3-legged stool sources of income?
Outdated financial planning conventional wisdom said folks spent 20% less in retirement. The new, harsh reality is that folks spend up to 120% or more vs. pre-retirement expenses – in part due to rising medical.
Here are the 3 critical steps to eliminate the gap between income and expenses:
- Retire later
- Save more
- Seek professional help (including help with your investments)
We’ll discuss aspects of these 3 critical steps in greater detail in our next blog!
Copyright © 2011 by Eve Kaplan
Tags: 3-legged stool, financial planning for retirement, outliving your assets, retirement planning
Posted in Fee-Only Financial Planning, Financial Planning, Retirement Planning | No Comments »
August 25th, 2011
by Eve Kaplan, CFP(R) Practitioner
Imagine you’re on a train headed for California. You know the train ride will take some time. You know the train will slow or stop at stations, accelerate to a certain speed, ascend to higher elevations, descend again and hit some switchbacks.
You plan on riding all the way to California, but you get motion sickness when you hit a series of switchbacks and you feel the train descending rapidly. Do you: 1) continue your journey or 2) jump from the moving train mid-way?
I hope you answered “continue my journey” and didn’t say “jump from a moving train”! Or should I say – I hope you stick with your investment strategy and don’t bail (panic) by selling into lower markets when they begin to decline?! Because – like all journeys – investing in stocks (US, overseas markets) is not always smooth. However, stocks can get you to your destination: a nest egg that carries you through retirement.
Why not bail on stock markets when you hit a rough patch? For one, it may be easy to exit the market (jump from the train) but how do you get back on board? One of my investment rules of thumb is – don’t do what your gut tells you to do. When markets become choppy, volatile and uncertain, there’s certain to be an overabundance of negative news in the media. If you actually listen to it, your gut feeling will tell you “jump from the train!” But that’s exactly the wrong thing to do, at the wrong time, for the wrong reason.
Here are some things to ponder before you consider jumping from any train:
1. You will have a smoother ride if your portfolio is prudently constructed and well diversified. Exposure to various stock markets (US large, mid and small, international developed, emerging, growth and value) reduces the pain of hitting a speed bump. Add various types of bonds, commodities, real estate investment trusts and alternative investments, and your ride is relatively smooth.
2. Occasionally this system breaks down (e.g. during the 2008 meltdown) and it seems like there is no save place to hide. That experience is temporary because the benefits of diversification resurface.
3. If you live into your 90s, you may have 20-50 more years on your train ride. It makes no sense to jump from a moving train (react to the market short-term) if you’re in it for the long haul.
4. Studies show individual investors typically earn a fraction of their promised rates of return because they hop in and out of holdings –usually at the wrong time. Poor timing means they rack of transaction fees and end up “buying high and selling low.”
5. Rebalancing your portfolio (selling outperforming investments, buying more underperforming investments) can contribute to a smoother ride (better return). If your model portfolio is 60% stocks/40% bonds now, and market movements change this to 55% stocks/45% bonds, consider gradually buying more stocks/selling more bonds until you get back to your optimal 60% stocks/40% bonds portfolio.
If you work with a good investment advisor/financial planner, you’ll have someone prevent you from following your gut reaction to “jump from the train.” If you don’t work with anyone, consider utilizing professionally managed portfolios at Vanguard, Fidelity, T. Rowe Price, etc. Once you find the portfolio that’s right for you, stick with it through market turbulence. Having your investments rolled up in a one-stop-shop will help you avoid the temptation of jumping from the moving train.
Copyright © 2011 by Eve Kaplan
Tags: asset class diversification, dos and donts in investing, investing dos and donts, long-term investment planning, market timing, market volatility, rebalancing, staying the course in investing
Posted in Investing, Investments, Retirement Planning | No Comments »
August 12th, 2011
By Eve Kaplan, CFP®
Do worries about having enough money to cover retirement keep you awake at night? Do you feel unhappy about the prospect of having to work many more years in a job you don’t love? Relief may be at hand if you consider the new retirement paradigm that offers a reasonable trade-off between continuing work and beginning to enjoy retirement activities while you still work.
The new paradigm goes like this example:
Let’s say your financial planner explains you can’t afford to retire now – you need to work another 4 years. Is the advice more palatable if you reduce retirement savings and use it now to pay for the retirement activities you look forward to?
Donald and Jane earn 150K/year. Both are 63. Their immediate retirement dream is to criss-cross the US by trailer to visit all the US National Parks. Their financial planner tells them they need to work to age 67 so they retire on at least 75% of their preretirement income (=113K/year) . If they retire now, social security + withdrawals from their retirement income only provide 55% of their current 150K income. That’s not enough to sustain retirement into their 90s.
Donald and Jane aren’t very enthusiastic about working another 4 years, but their financial planner creates a new transitional retirement strategy:
1) Postpone taking social security until Donald and Jane are 70. Social security benefits increase by approximately 8% per year from ages 66 – 70. It pays to take social security at age 70 once someone lives past 78/79 years of age. Donald and Jane are in good health; their financial planner is assuming they will live into their 90s. They also have enough money to cover living expenses from ages 67-70.
2) Continue to save for retirement, but significantly reduce savings. Instead of
saving 33K/year in their 401(k) plans (16.5K per person, before company match), Donald and Jane scale back their contribution to 10K each. They still benefit from a company match, but they don’t save the maximum amount they could each year in their 401(k).
3) Donald and Jane use the 13K/year amount they would have saved in their 401(k) plans (33K minus 20K = 13K ) and spend it on themselves each year, until they retire at age 67. They use this money to rent a trailer and visit 2 national parks each year during their vacations.
In sum, Donald and Jane agree to work an additional 4 years, but they begin to enjoy some of their retirement activities now. In this example, their financial planner projects they will average 82% of their preretirement income throughout their retirement – instead of the measly 55% they would have had if they retired at age 63.
This nuanced approach toward retirement planning fits better with the new realities of work/retirement in the US – often a prolonged, transitional process instead of an abrupt halt – from one day to the next – of work and retirement.
It’s the job of a good financial planner to balance the need for additional assets and savings with the need for “retirement activities” some people can enjoy before they officially retire. However, I don’t recommend you contemplate making Donald and Jane decisions on your own since outliving your assets remains one of the biggest risk the Boomer generation now faces. Careful planning is involved to achieve this type of transitional retirement approach. See your financial planner for more information.
Copyright © 2011 by Eve Kaplan
Tags: Retirement
Posted in Retirement Planning | No Comments »
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Eve Kaplan, CFP®
