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National Institute of Transition Planning, Inc.
Resolve to Take Control of Your Financial Life in 2012
[January 2012] If there is anything about the future we could all agree on, it is unpredictability. Naturally, this makes us uncertain about our financial future. What can we do to grow and protect our retirement savings and address other financial needs?
I think the answer is to focus on those things we can control. What better way to start the New Year than to get your financial house in order. Here are 8 steps that you can put you on the right path.
Review your goals: As baseball legend Yogi Berra reportedly said: “If you don’t know where you are going, you may not get there.” Many of us have financial goals in mind, but they are often vague. Our retirement, as well as funding for college, weddings, home upgrades, big vacation trips, and more require us to know how much money will be needed, and when. Setting goals is THE essential first step to getting control of your financial future. I suggest breaking goals into short, medium and longer timeframes, estimating their cost, and prioritizing. This will clarify the direction you want to go.
Know where your money goes: The Rolling Stones song “Slipping Away” begins: “It’s just another dream that’s slipping away…”. Unfortunately that is too often the case with our money. Many federal employees will earn $3-5 million over 30 years of work. Where does it all go? Knowing the answer is fundamental to maintaining control of your finances and meeting your goals. I think it is useful to break monthly expenses into fixed and discretionary categories. Basic worksheets are available online, e.g. http://www.home-organizing-ideas.com/budget-worksheet.html. Armed with this information you can find the money that is just slipping away; you can determine ways to reduce expenses and save more; and you can better estimate how expenses might change in retirement.
Increase your savings: If there is one key to your future financial security, it is how much you save. Unfortunately, every study shows that most of us are not saving nearly enough. The TSP offers pre-tax saving with a 5% match (for FERS employees). Contributions come out of pay automatically once you set it up, forcing you to “pay-yourself-first”. I suggest trying to save at least 15% of your salary. This will be near the 2012 IRS limit of $17,000 (if under age 50) for many employees. There is a calculator (“How Much Should I Save”) on the TSP web site (www.tsp.gov) under “Planning and Tools” that will help you calculate how much you need to save for a secure retirement. Another TSP tool (“How Much Will My Savings Grow”) will tell you how much your TSP contributions will grow, including your match. This tool is also a good way to prove how important it is to start saving early and enjoy the “magic” of compounding.
Retirement savings should come first, but there are other goals that require additional savings. For college, 529 plans are a good choice for tax-advantaged saving. Roth IRAs can serve saving needs in addition to retirement because contributions (not earnings) can be withdrawn at any age without taxes or penalties. Finally, don’t forget to maintain an emergency cash reserve (at least 3-6 months of expenses), primarily in CDs and money market accounts.
It may sound “old school”, but it really is all about how much you save.
Mind your credit: Credit card debt is a wealth killer! If you have balances beyond 30 days, resolve to pay them off and not re-create them. Go to www.annualcreditreport.com to get a free report of all of your accounts and activity in your name. Go to www.myFICO.com if you would like to know your credit score (small fee). MyFICO is also a great resource for tips on how to keep your credit score high.
Review your insurance coverage: Most of us don’t like buying insurance. I don’t! But insurance is essential to our financial security. Go through this insurance checklist in the New Year:
(1) Home and auto insurance: We all have it, but do we really understand the coverage? Avoid surprises when filing a claim! Spend an hour or so with your agent going over current coverage and discussing options. Shop and compare rates offered elsewhere. While discussing auto and home insurance ask about umbrella liability coverage, which builds on these policies and raises your liability limit significantly. It isn’t expensive and could protect your assets from a major litigation against you.
(2) Long term care costs are one of your greatest potential financial liabilities. It is unpleasant to think about it, but if you need care, and many will, this insurance can preserve your assets or relieve your family of a care burden. LTC insurance is cheaper when you are younger and in good health. Investigate the Federal Long Term Care Insurance Program as well as private insurance.
(3) Most of us have life insurance, but is it the right kind and right amount? Term insurance is far cheaper than whole life or universal life insurance. There are online calculators available such as this one to determine need: http://www.bankrate.com/calculators/insurance/life-insurance-calculator.aspx. FEGLI basic insurance is automatically provided unless declined.
(4) Federal employees have great health insurance options. Don’t forget to review your needs and the cost of different options during open season. And make sure to contribute to the Health Care Flexible Spending Account. Paying health care costs with pre-tax money usually saves 30% or more.
(5) Early to mid-career employees should consider disability income insurance. The Federal disability retirement benefit will replace less than half of your income and doesn’t address short term disability situations.
Review your investment strategy: A sound investment strategy is critical for growing and protecting your assets. Everyone should have at least a basic guide that includes:
Keep your investments on track: Your investments, like your car or your health, require regular check-ups. With the TSP the principal task is to periodically rebalance. Keeping allocation on track keeps your risk where you want it and forces you to sell the funds that have gone up the most and buy those that have gone up less or have gone down. This is an automatic “buy low, sell high” discipline. At least once a year, go to your account allocation page on the TSP web site and write in your desired percentage allocation in each fund. The money will be automatically redistributed. It can be done in 10 minutes. Use the same percentages for your new contributions that go in monthly. (No need for this with L funds).
For investment outside the TSP, such as IRAs, you can improve control by owning index funds. Fees will be low, and it simplifies selection and maintenance.
Prepare for the inevitable: No one likes to think about death, and perhaps because of that we tend to ignore what are commonly called estate documents. These are critical at any age. The basic set includes a will, a general power of attorney, a medical power of attorney, and a medical directive. An estate attorney can prepare them for you. There are other important documents that also bear on what happens after your death or incapacity and that supersede your will. These include beneficiary designations in your retirement accounts, e.g. TSP, IRAs, etc. and jointly-owned assets such as your home or investment accounts. For federal employees, your pension, TSP, life insurance, and “last paycheck” all have beneficiary designations. These must be kept updated as life situations change.
Stephen Lingle is a financial planning speaker for NITP and a Certified Financial Planner with Lighthouse Financial Planning, LLC in Potomac, MD1/4/2012