Friday, September 21, 2007

Retirement Planning and Your family

Retirement Planning and Your Family



There is a fine line between selfishness and selflessness. Call it a grey area. Better yet, call it a graying area.


In the world of retirement planning, it is how you navigate this no-reward zone that separates those who can (make and keep to their plan) from those who cannot (finance all of the needed accounts that make retirement what it could be).




The suggestion to begin early in life with your retirement plan is made for a simple reason: failure to finance these plans early on offsets the chance that you will be forced to make a decision at some point, taking into account the pressures that family will place on you.

The cost of raising a child is relatively well known. Calculating those numbers, and you can try your plan at Baby Center yield some long range and conservative projections. Using the default information available at their calculator estimates that your child, as yet to be born will cost you $266,698. Those figures, by the way are in 2006 dollars.




But consider this, before we move on to the more difficult subject of retirement planning and your parents, many of the costs that these kinds of calculators estimate will be incurred children or not. You will pay for housing, medical, food, clothing and transportation, kids or no kids. Your skills as a money manager will, without a doubt be put to the test the larger the family you have however, these are not break-the-bank problems that are insurmountable.

The real and almost incalculable cost comes from the other end of the spectrum: your parents and those of your spouse. There are over 20 million of us caring for our parents or otherwise financing that care above and beyond what social insurance and services provide.

ABC News referred to it as Role Reversal. Elderly caretakers and those who might possibly be at some point have been described as the “sandwich generation”, caught between those "costly children" and those aging parents. Few of us calculate these costs when we stare dreamily into the future thinking about our own retirement.




There are several ways to offset these problems before they arise. First, be selfish about your own retirement. This is what will keep you from possibly having the same situation your aging parents maybe in or are headed for. This is best offset by beginning your savings for retirement early. You will be able to save less allowing compounding to do the work for you.

If you are starting later, a group I refer to in the book as "the Chaser", that selfishness becomes even more important. Beware though of the rising feeling of guilt that can accompany this plan. You will, without a doubt, see some of the money as better spent on the kids or even the parents. But doing yourself the favor is also doing your children the favor as well.

As you approach retirement, you will have a better grasp of the actual cost of your family. You will have built a better base – at least financially that many allow you to take a few extra days off to care for that aging parent without jeopardizing your nest egg.

Below, you will find some additional information of how to handle this problem from the folks who focus on the issue.

THE AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE AGING (www.aahsa.org or 202-783-2242) publishes free brochures on how to choose a nursing home or assisted-living facility, a directory of continuing-care retirement communities, and information on long-term care insurance.

FAMILY CAREGIVER ALLIANCE (www.caregiver.org; 415-434-3388) offers information for caregiver concerns, newsletters (English, Spanish, and Chinese), and an online support group.

THE NATIONAL ALLIANCE FOR CAREGIVING (www.caregiving.org; 301-718-8444) is a national resource center that provides information on elder-care conferences, books, and training for professionals.

NATIONAL ASSOCIATION OF AREA AGENCIES ON AGING (www.n4a.org; 202-872-0888), an advocacy group for local aging agencies, offers The Eldercare Locator (800-677-1116), a service that puts you in touch with a local resource-and-referral organization, which, in turn, will recommend home health care aides.

Thursday, September 13, 2007

Retirement Planning and the College Loan

Retirement Planning and the College Loan



There are basically three types of college loans: the one you do not have, the one you are paying for or the one you are paying for your children.

I write the following in the book: "Yet the psychology of debt assumes that it (and this instance we are speaking about your ability to repay your collegiate debt) will soon turn bad."

“Life is a maze….” Cyril Connolly, 1944


There was a time in the not-so-distant past when college graduates and those who chose to enter into the workforce could expect to earn similar incomes. Thirty years have passed and, as we all know (or assume) this is no longer the case. In fact, when those two post-high school incomes met along that timeline in 1975, college was much cheaper.

According to the College Board, who recently stepped away from the loan business, the average student will leave college with about $20,000 of debt. (Realistically, the student who fully finances her or his education will often have as much as ten thousand dollars of additional debt above and beyond the cost of classes.) And that is just for undergraduate public school completed in four years. Many students extend their college years beyond this, attending graduate school and adding another $30-40,000 in loans.

Want to find out how much you are likely to make with that college education? Salary.com has compiled a list of entry-level incomes for a wide variety of careers.

How does college play itself out in your retirement plan? There are three basic concepts to understand.

The first: A thirty thousand dollar loan can quickly turn itself upside down if the student does not pay it off early. Letting it languish for the full ten-year payback period will add as much as a third more to the cost of the education.

Second: Because the student is not likely to prioritize those loan payments, they will be much more prone to roll the debt over into some sort of longer termed consolidation loan, extending the period of payback and because of that, paying additional interest charges, fees for loan origination and in the process, learn one of life's most frequently taught lesson – debt overload. Once this happens, and if the post-college income generated from those years racking up that debt fails to match the debt, young people just starting out will be well behind the best years for saving.

Third: Parents shouldn't pay. Okay, middle class parents shouldn't pay. Diverting money to your child’s education seems noble enough and might even make you feel better but it doesn’t work if you are not using that money for your own retirement.

I have suggested that a family with a household income of less that $80,000 devote any money to growing their child. Lessons, activities, sports and travel all eat up enormous amounts of cash from the average budget. But it will produce a much better (and more attractive, at least from a collegiate perspective) citizen/student. And that child is more likely to obtain scholarships and grant money because of it.

Parents at this income level have few good opportunities to save for their own retirements. Passing up even so much as single dollar directed towards a savings plan for those later years would be catastrophic.

Incomes above that amount will not be in much better shape to save for college but they will feel the pressure of their peer group to do so. With the recent credit crunch revealing some cracks in the accounting of many households who have kept their eye on prizes they could ill afford, saving for college may add to an already strained budget.

Retirement planning rule of thumb: If your total household debt exceeds 70%, you should focus on your future and not that of your child(ren). That debt will afford them better borrowing opportunities but, on the other hand, that same debt will be creating a negative momentum for your own future.