How You Can Ruin Your Retirement Plan With Too Much Optimism

 If you ask most folks who are heading for retirement what their major goals are, you will get an answer something like this:  I hope to maintain my current lifestyle and I do not want to run out of money until I die.  And if you ask them if they will make it, they will most likely say, they think they will.

Yet, the decisions people make may be too optimistic and may actually sabotage those very goals. Let me give you some examples.

• Taking early retirement packages because they are offered.  If you do this in your 50’s, you have potentially 40 years of income needs. Where is the income going to come from?  Many hope their assets will “hold out”.  Perhaps consideration to sticking with the current job, finding another one for cash flow and knowing if assets will “hold out” is a better plan.
• Thinking you will live well today and cut back when you are really old.  Catch 22 here.   You may be able to work now but that is not the case when you are 8o years old and need the income to cover inflated expenses and health care costs.
• Buying too much house with too big a mortgage because houses always appreciate.  Homes are often the biggest investment consumers make but not necessarily the best investment.   Homes have not appreciated much in the past 15 years and many folks have pulled out the equity like they are a bank account.  When selecting a home as you near retirement, consider if you will be able to continue to afford to live in it. 
• Leasing high priced cars and several of them.  We have been sucked into the “I deserve a nice car” advertisements.   Consumers are enjoying expensive rides, but they are putting out big bucks each month for the pleasure.   Most people know the cheapest way to buy a car is with cash.  If we put on that sensible hat when selecting cars, even when leasing, we might make some very different choices and have money at the end of the month to save toward retirement.
• Being overly generous to family members when you may not be able to afford it. You are kindest to your family when they don’t have to worry about paying your bills.
• “I am in great health!”  I do not need expensive health insurance, long term care insurance or life insurance.  It can’t happen to me syndrome is alive and well.  A little hedging with insurance to cover these potential risks is prudent.
• Last but not least, if I am careful with my investments, I can make at least “X”%. Maybe, but risking your financial future on an overly optimistic number is a disaster. Remember we are talking 30- 40 years of retirement income here.

How do you avoid these pitfalls and yet have a good life today?  You have a financial plan.  A plan is like a road map.  It should help you to get to where you want to go without taking too many side roads.  A plan helps you pick and choose what you want today but plan for tomorrow.  A financial plan is based upon realistic expectations and not hopeful or optimistic expectations.

The information contained in this report does not purport to be a complete description of the securities or markets referred to in this material.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

There's Still Time to Contribute to an IRA for 2011

There's still time to make a regular IRA contribution for 2011! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2011 ($6,000 if you were age 50 by December 31, 2011).

For most taxpayers, the contribution deadline for 2011 is April 17, 2011. Normally, your federal tax return must be filed by April 15. However, the IRS has extended the deadline to April 17 this year because April 15 is a Sunday, and April 16 is a holiday in Washington D.C. (Emancipation Day).

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don't exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2011, even if your spouse didn't have any 2011 income.

Retiring Comfortably

According to the Employee Benefit Research Institute the past few years saw a sharp decline in Americans’ confidence about their ability to obtain a financially comfortable retirement.  The 2011 Retirement Confidence Survey finds that the percentage of workers reporting they are not at all confident in a comfortable retirement has climbed to a new high of 27% (up from 22% in 2010 and a recent low of 10% in 2007).

If you believe you are behind in preparing for retirement there is no need to make the fundamental tenants like saving money and repeating the process over and over more complex. Here’s how to get started today:

1.  Remember your investment time horizon is the rest of your life . . .  and not your retirement date.  This means if you are 45 today and live to age 90, you have 45 years for your money to be working for you.
2. Ramp up retirement savings by contributing the maximum amount to your 401k plan; ($17,000 for 2012 and if you are over 50 the extra “catch-up” amount is $5500).  IRA and Roth IRA limits for 2012 are $6000 and the extra catch-up amount for those 50 and older is $1000.
3. Avoid speculative investments to try and make up for lost time or money.  If you don’t already have a financial plan to help guide you to a comfortable retirement make it a goal to call a financial planner today.   

It’s fair to say that retirement in the 21st century will be quite different than generations before. But that doesn’t mean you aren’t in control. By focusing on your own behavior, you do have the ability to create a map for your own future.

Please watch for our next post where we discuss generating income in retirement. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

This is Not Your Mother’s Retirement

Women are redefining the face of their retirement, especially when compared to generations before.  In 2010, the US Bureau of Labor Statistics reported that women comprised 47% of the total US labor force.  That figure is forecasted to grow to 51% by 2018.  Bye-bye glass ceiling. 

One result of this growing trend for women is that many are choosing to work outside the home longer than their mothers and actively pursue interests such as travel, volunteerism, and higher education.  Add increased longevity to the mix and it is not a stretch to understand that in addition to hopes and dreams for a healthy and happy life, living longer means retirement will cost more. 

Envisioning a future retirement and the costs associated with bringing your personal retirement story into focus can seem like a big task (not all that different from starting an exercise program, really).  As with any important goal the most important part is to write it down.  When you are ready to set goals and get results a financial plan is your “go to” document for all important financial decisions.  

The good news is that women are heeding the call for more active financial planning.  With more education and greater participation in management and professional occupations than ever before, women now also have more reason to learn about the value of personal finance and financial planning.   

Here are three important areas in the financial planning process that tie money to quality of life. 

1.  Don't Wait

• Follow your dreams -- they know the way
• Start now -- don't assume financial planning is for when you get older.

2.  Consolidate

• Even if the individual areas of your finances are under control, you gain an advantage when they are pulled together.
• By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals.

3.  Balance is Key

• Re-evaluate your financial plan periodically and adjust along the way.  Life events frequently interrupt an otherwise perfect plan.  Incremental adjustments along the way keep you headed in the right direction.

As you begin to dream and plan for your own future, I am reminded of a favorite quote:  Your imagination is the preview to life’s coming attractions.  Albert Einstein

The Key to Planning for Your Lifestyle in Retirement

After working with retirement clients for nearly 30 years, I have learned many things.  One of the most important lessons I have learned is that we all need to have the answer to one very simple question before we begin the planning process -- “what does it cost for me to live per month”?   As planners we can develop scenarios to help achieve retirement goals, but if we start with the wrong premise, we may be forming strategies to meet the wrong goal. 

Why is it so difficult to come up with a figure for our income needs? The general tendency is to underestimate expenditures and overestimate income. We also think about what we should be spending, not what we do spend.  Not knowing our expenditures comes about because we forget a few things:

• Food, shelter, transportation and clothing are only the beginning of expenses. They are the ones we see each month.
• We need to add insurances, taxes, gifts, car replacements, vacations, travel, family visits, and hobby and entertainment expenses. 
• If you have children, your educational expenses may drop off by the time you retire but you need to determine how much you might need for weddings and launching (yes—getting your darlings out of the parental home)
• If you plan to change your living arrangements, you need to factor in not only the additional cost of making a change but also the change in monthly expenditures related to the move.

There are circumstances that are out of our control, such as the rising cost of health care and insurance, declining markets and inflation.  To guard against these events we need to factor in percentage increases over time and to have a savings cushion of at least six months to help us weather the storm.

When I have gone through this analysis with clients, I often find a dramatic difference between projected income needs and actual income needs.  Can you imagine trying to reach your destination with only half a tank of gas?  It doesn’t work. Using the wrong expenditure figure can ruin the lifestyle you anticipated.

Talk to your financial advisor about tools to help you track your monthly income needs.