Managing and Planning your Future: Preparing and Investing for Life s Challenges

Transcription

1 Managing and Planning your Future: Preparing and Investing for Life s Challenges Presented By: Keith Sawdon, Retired Director of Finance City of Rochester Hills What studies are telling us about Financial Health 3/4 of employees under financial stress Not saving enough to meet financial goals (retirement, college, etc.) Don t have 90 days living expense saved Not (financially) prepared for expected life-changing events (i.e. marriage, child's education, job change) Health care costs, are 4.5% lower for those practicing good financial habits while health care costs, for those not following good financial practices, are higher by 19%. 1/3 say money worries keep them awake at night at least occasionally 1/4 think about their financial health often, if not constantly. 1/4 companies reporting indicated that employees are experiencing more personal financial challenges now compared to the past. 2 1

2 What we are learning about Financial Health 2/3 of Americans report having various levels of financial problems 1/3 of employees say they have savings to cover six months of living expenses 1/2 of American families have an retirement account (median value = $43,000) 3 Financial Health Financial Planning & Investing Estate/Trust Planning Financial Health Household Budgeting Credit/Debt Management 4 2

3 Benefits of having Good Financial Health Improve physical health Reduce stress levels Lower health care cost Improve credit scores Increase savings/reduce debt 5 The Importance of having a Household Budget Financial Planning & Investing Estate Planning Financial Health Household Budgeting Credit/Debt Management 6 3

4 Why have a Household Budget? Helps identify small spending changes that help improve your ability to save and/or reduce debt. Saving more or reducing debt, directly impacts your standard of living today and in the future. Helps us change our spending habits so we can pay yourself first through saving 7 Why Create a Budget or Spending Plan? Helps us meet our obligations Helps us reduce anxiety Gives us control over your money and spending Helps us build net worth 8 4

5 Benefits of Budgeting Better control over your finances Controls spending to help you save more Protects and improves your credit rating More confident about your finances Avoids penalties and late fees Improves your ability to save to reach your financial goals 9 Understand Your Spending Style Are you living beyond your means Are you living at your means Are you living beneath your means 10 5

6 Let s see What Type of Spender You are? Examples of living Live on a budget and regularly put money in a savings account? Live in a nice house, but struggle to cover your homeowner s insurance and property taxes? Work hard, play hard, and live for today without running up debt? 4. Juggle 4 or 5 credit cards which are often maxed out? 5. Eat at nice restaurants, but only after your bills are paid and you put some money in savings? Beyond At Beneath $ $ $ $ $ 11 Essential vs. Discretionary Spending Essential (Needs) Discretionary (Wants) Savings (Retirement, Emergencies, Etc.) Housing Heat Food Car and Car Insurance Entertainment Eating out Travel Gifts Cable TV 12 6

7 How We Sometimes Overspend Golf Weekly expense: $ 00,0080 Total spent by retirement: $ 156,748 Total earned by retirement if invested: $ 322,103 Assumptions Retirement timeline: 25 years Retirement age: 65 Rate of return: 6% Annual inflation: 3.25% 13 How We Sometimes Overspend Eat Lunch Out while at Work Cost per day: $ 78,378 Total spent by retirement: $ 78,374 Total earned by retirement if invested: $161,051 Assumptions Retirement timeline: 25 years Retirement age: 65 Rate of return: 6% Annual inflation: 3.25% 14 7

8 Monthly Budget Net Income Expenses % Spending Type Net Income You 3,500 Savings % Essential Your Spouse 2,200 Mortgage 1, Essential Property Tax Essential Property Maintenance Essential Utilities Essential Auto Essential Auto Insurance Essential Food Essential Health Ins 1, Essential Cable & Internet Discretionary Entertainment Discretionary Total 5,700 Total 5, % 15 Net Income Net Income Monthly Budget Expenses Savings (15%) 850 Retirement 500 Deducted from check and paid to Employer 457 Plan Emergency Fund 100 Deducted from check directed deposited in credit union account College Fund 250 Deducted from check, deposited in credit union account, debit withdraw once a month to a 529 account. 16 8

9 Monthly Budget Net Income Net Income Expenses Savings (15%) 850 Retirement 500 $218,071 by the time you retire (20 yrs) College Fund 250 $109,035 by the time your child turns 18 Annual Inflation Rate: [3.25%] Pre-retirement Rate of Return: [6%] Age at Retirement: [65] Starting at age; [45] Annual Inflation Rate: [3.25%] Pre-retirement Rate of Return: [6%] Starting College at: [18] Starting at age: [1] 17 Setting Financial Goals A goal should be explicit, identifying something you want to achieve A goal should be measurable. You need to be able to see how you re doing in reaching the goal A goal should be obtainable. Setting goals to high can lead to frustration. A goal should be rewarding. Reaching a goal should reward you for the hard work. Once goals are identified, write them down Organize your financial goals as either Short, Mid and Long-term Evaluate your progress annually 18 9

10 Understanding Credit Financial Planning & Investing Estate Planning Financial Health Household Budgeting Credit/Debit Management 19 Why Is having Good Credit Important? Is a convenient way to pay for items when you do not have any cash Is useful in times of emergencies Allows you to pay for large purchases over time Can affect your ability to obtain: employment housing, and insurance 20 10

11 Your credit report tells creditors: Who you are How much you owe Credit Report Whether you have or are making payments on time Whether you have any collection actions, bankruptcies, judgments, etc. against you How many recent credit report inquiries have been made on you 21 Credit Reporting Agencies Equifax Experian TransUnion 22 11

12 Free Annual Credit Report Visit: Call: Mail: Annual Credit Report Request Service P. O. Box Atlanta, GA Credit Scores A number that helps lenders determine your credit risk Two types: The Fair Isaac (FICO) Score Vantage (3.0) Score 24 12

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14 Estate Planning Preparing Now for Later Financial Planning & Investing Estate Planning Financial Health Household Budgeting Credit/Debt Management 27 Basic Estate Planning Will Beneficiary Designations Living (Revocable) Trusts General Power of Attorney Health Care Power of Attorney Will Substitutes 28 14

15 Tools to help you with Estate Planning Michigan has designed a booklet to assist you in planning and getting your estate plan in order. Provides frequently asked questions and general information Provides a place to record your personal information (financial, medical, RX, etc.) A fillable form Michigan's Statutory Will A fillable form Patient Advocate POA (Health Care Power of Attorney) Other issues like Funeral Representative designation and organ donation Will Basic Estate Planning Everyone should have one Sample Key provisions Identify the writer of the will (Testator) and the family Special burial instructions Name of fiduciaries, personal representatives or guardians Detail your gift wishes Other general provisions (compensation for Fiduciaries, etc.) 30 15

16 Basic Estate Planning Beneficiary Designations Should be reviewed annually Generally, supersedes the provision of the will Needed for Life Insurance IRAs, Retirement accounts, and inherited IRAs 31 Living (Revocable) Trusts Basic Estate Planning A trust created during the lifetime of the person creating the trust (grantor) i.e. a Living Trust. Contains terms allowing the grantor to revoke and or amend those terms during the grantors lifetime Avoids probate and reduces legal fees, probate court expenses and reduces exposure to federal estate taxes Manages property during the grantor s lifetime and at the time of death 32 16

17 Basic Estate Planning General Power of Attorney Designate an agent or attorney in fact It can have immediate or postponed authority Must acknowledge the duties under a POA Can help avoid future conservatorship Sample General Power of Attorney form included in handout 33 Basic Estate Planning Health Care Power of Attorney (Patient Advocate) You designate a patient advocate not a probate court A guide for the patient advocate s decision making End of life decisions Essential for long term incapacity issues May help avoid the need for a future guardian Sample Health Care Power of Attorney included in handouts 34 17

18 Basic Estate Planning Will Substitutes Lady Bird Deed (enhanced life estate deed) Quit claim deed(s) Transfer on death Use of joint property with a spouse and/or child. 35 Lady Bird Deed Basic Estate Planning A lady bird deed (also called an enhanced life estate deed) is a special form of life estate deed that gives the owner continued control over the property until his or her death. Once the owner dies, the property is transferred to the new owner(s) without the need for probate. Ruled not a transfer of ownership (MTT Docket No ) More information about a lady bird deed is included in the handouts 36 18

19 Basic Estate Planning Quit claim deed(s) A quitclaim deed is a legal instrument that is used to transfer interest in real property. The entity transferring its interest is called the grantor, and when the quitclaim deed is properly completed and executed, it transfers any interest the grantor has in the property to a recipient, called the grantee. 37 Basic Estate Planning Transfer on death A transfer-on-death (TOD) deed, or beneficiary deed, allows an owner of real property to execute a deed that names a beneficiary who will obtain title to the property at the owner's death without going through probate

20 Basic Estate Planning Review our estate plan annually According to AARP, more than 50% of Americans die without a will, living trust or other critical estate planning documents A person who dies instate (without a will or trust) will have their estate distributed following state law. 39 Financial Planning Predicting and Managing the Future Financial Planning & Investing Estate/Trus t Planning Financial Health Household Budgeting Credit/Debt Management 20

21 Basic Financial Planning Looks at all aspects of your finances A comprehensive evaluation of your financial condition Provides a review of current and future income and expenses Applying a set of assumptions and variables to predict future income, expenses and investment asset values and withdrawal plans. 41 Basic Financial Planning Things you should consider in building your plan Your financial goals and when you want to reach them. Your current investments, including pension and savings plans Your tolerance to investment risk Current income and expenses including debt and/or loans Insurance: life, auto and health insurance. Taxes including income, property and tax on your investments

22 Sample Retirement Financial Plan Retirement Financial Plan Investing your Savings to meet your Various Financial Goals 44 22

23 Using the Right Investment Asset Mix Financial Health 45 Managing Risk- Using the right Mix of Assets Managing investment risk involves using difference asset classes Equities (stocks) Bonds (fixed income) Cash equivalents (money market funds) Asset classes perform differently in various business cycles and are always moving and changing An investment portfolio with different asset classes (diversification) helps reduce volatility 46 23

24 What determines the right Asset Mix? Your tolerance for risk Higher tolerance = more equalities (80/20) Lower tolerance = more fixed income (20/80) Your time horizon Shorter the horizon = more fixed income Longer the horizon = more equalities

25 Risk vs Time Horizon

26 Financial Health 51 Failing to take full advantage of tax-favored investment accounts (IRAs, 401s, 457s, etc.) Improper investment asset allocation and/or risk management Getting bad or no advice Not knowing how much money you ll need to meet your financial goals Not saving enough Common Mistakes 52 26

27 Remember Each Financial Goal has its own Constraints It s important to understand that each financial goal has different objectives Time Horizons - Short, Mid and Long-term Risk Constants 53 Don t forget about the Power of Compounding 54 27

28 THANKS FOR COMING 55 Financial Health 56 28

29 Managing and Planning your Future: Preparing and Investing for Life s Challenges Presented by: Keith Sawdon Voice/Text: sawdonk@gmail.com 57 29