The 12 Reasons You Need to Plan
By Ric Edelman
Forty years ago, the financial planning profession did not even exist, yet today, hundreds of thousands of people claim to be financial planners (and some of them actually are!). But is financial planning really necessary? Well, yes. Here are 12 reasons why you need to plan.
Reason #1: To Protect Yourself and Your Family Against Financial Risks
Notice the word financial. As a financial planner, I cannot protect you from the risks you face in life — no planner can — but I can protect you from suffering the financial loss that may result when any of those risks become reality. What are those risks? The five major ones are job loss, injury, illness, death, and lawsuits, and you'll learn how to manage and reduce the adverse financial impact of those risks in Parts VII and XI.
|Lawsuits? You bet! For perspective, the odds that your house will burn down are 1 in 1,200 — yet according to Forbes magazine, the odds are just 1 in 200 that you will be sued at some point in your lifetime. (To learn how to protect yourself from the financial threat of a lawsuit, see Chapter 75.)|
Reason #2: To Eliminate Personal Debt
For some people, a proper goal is to become worthless. If you owe lots of money to credit cards, auto loans, and student loans, becoming worthless would be a real improvement. You must move from owing money to owning money.
Indeed, total consumer debt in this country (excluding mortgages) exceeds $2.5 trillion, according to the Federal Reserve. A 2008 survey from Gallup Research reveals that Americans hold an average of four credit cards each, with an average total balance of $3,848.
You've heard the joke about "running out of money before you run out of month," but it's not so funny to run out of money before the end of your life! You must make sure you don't outlive your income, and that means you've got to accumulate assets so you can support yourself for a lifetime. That's impossible to do if you have credit card debt and personal loans, so you must eliminate them. Chapter 49 will show you how.
Reason #3: Because You’re Going to Live a Long, Long Time
At the time of the American Revolution, life expectancy at birth was 23 years. Even by 1900, Americans were expected to live only to age 47. Thus, throughout most of our nation's history, if you were alive, you worked; there was no such thing as retirement.
Today, though, life expectancy tables from such diverse groups as the IRS, life insurers, the National Institutes of Health and the Centers for Disease Control and Prevention all say roughly the same thing: A child born in 2007 now has a life expectancy of 77.9 years; a 75-year-old today is expected to live to 86.6; an 85-year-old to 91.4; and people who reach 100 are expected to live to 102.2 (yes, the older you are, the older you're expected to get!).
Soon, half of all deaths in the U.S. will occur after age 80. Such life expectancies are a big part of why we need to plan.
How Old Will You Be in 2110?
The ridiculous part of all those life expectancy tables is that they all assume that life expectancies will remain at current levels. But that is not likely to be the case. Indeed, research suggests that people will continue to live longer and longer. In fact, even those as old as 45 today might be alive in the 22nd Century. Why are these figures important? Well, to determine how much money you'll need in retirement, you need to project how long that retirement might last.
Based on the actuarial data provided by various government agencies, most financial planners assume their clients will live to age 90, and conservative planners (my firm included) use age 95 (because the longer you live, the more money you'll need). We're now even considering boosting the life expectancy for our younger clients to 100.
However, even "conservative" figures like age 95 could be too low. Based on the relatively new fields of gerontology, microbiology, and biotechnology, some believe that in the year 2050, people could be expected to live to age 140. No typo there: That's one hundred forty years of age. This is not science fiction. In 2050, your kids could still be having kids. For example, in 2050, I'll be 92. Will I make it? Well, that's still nine years younger than the age my Grandmom Fannie reached — and she was born in 1899.
Let's face it: For many of us, 2050 is a done deal. If that's not startling enough, try this: It's now being suggested that lots of us who are here today could see the year 2110. The implications for society boggle the mind. Let's look closer at what such long life spans could mean.
You’ll Have Multiple Marriages
First, you might have four or five spouses during your lifetime. Like all the other futurisms to follow, this one is not as far-fetched as it may first appear. After all, we've all heard the oft-quoted statistic that half of all marriages end in divorce.
And U.S. Census research shows that 58% of women over 70 have been widows at some point — with a great many of them remarrying. Thus, we're already a multiple-marriage society. It'll just become more so. (After all, can you imagine marrying someone at age 20 and living with that same person for the next 120 years!? Honey, I love you, but ...)
You’ll Have Multiple Careers
Second, you will have five or six careers. You'll go to school, get a degree, develop expertise in a given field, devote yourself to it for 20 or 30 years, then quit and start again, doing something entirely different. Think that's crazy? Millions of military retirees, police officers, firefighters, and schoolteachers already do this.
They "retire" at 40 or 50 with 20 or 30 years of service and, with their monthly pension checks in the mail, they head off to new challenges. This strategy will become more common during this century and the phrase "doubledipper" will give way to "quintuple-dipper" as people have five or six 20-year careers in their lifetime. The notion of "retirement" as we know it today will fade away. For more on this, read Rule 88 of The New Rules of Money.
You’ll Extend Your Rites of Passage
As our lifetimes become extended, so too will our rites of passage. As recently as 1960, marrying in your late teens was common; the phrase "old maid" applied to women who failed to marry by age 20. You were expected to have children (plural) before you were 25, Jerry Rubin told us not to trust anyone over 30, middle age and mid-life crises hit at 45, and the "elderly" were 65.1 As I bet yours does, my own life provides examples of this brave new world: My former college roommate didn't get married until he was nearly 50; my oldest brother will be 72 when his youngest daughter graduates from medical school; one of my nieces has three daddies (one biological, one marital, and one legal); my father renounced retirement four times before he passed away; and my grandmother buried four of her doctors before she died at age 101. If today's trends continue unabated, the year 2050 will find people marrying (for the first time) at age 50, having kids in their 60s (in France, they already are), facing middle age in their 80s, retiring in their 120s, and dying in their 140s.
These prognostications remind us that financial planning is a process, not a product. A financial plan must be periodically reviewed, with its assumptions challenged and altered based on changes in the economy and in your circumstances.
One key circumstance is the fact that you may live much longer than you envision. If you plan to retire at 65 and are assuming a life expectancy of age 90, you're assuming a 25-year retirement. But what if you live to 140? Will you have enough income for a 75-year retirement?
Finally, who's going to pay for it all? This question suggests that the most politically explosive social issue in America today — the right to life — will evolve into a new debate. In the 21st Century, with people living for so many years beyond their resources and society forced to pay the tab, some will argue that those who cannot take care of themselves in old age, those who are living in pain or discomfort, those who do not have a family or support group on whom to rely, and those who cannot afford to pay for their care should have the right to choose death.
In the original edition of this book, I predicted that euthanasia would take the center stage of social debate in 2050 — and that prediction has already come true. End-of-life issues joined the political debate in 2009 when Congress debated health care reform. The term "death panel" became popular jargon as politicos debated the idea of paying doctors to discuss living wills and medical directives with Medicare patients. The debate heated up after renowned British conductor Sir Edward Downes, 85, and his wife, Joan, 74, traveled to an assisted suicide clinic in Zurich, Switzerland, to end their lives together — even though Sir Edward's life was not at risk. Joan, a cancer patient, had only weeks to live, and Sir Edward reportedly didn't want to continue living without her.
Whatever you think of the issue, the debate clearly has begun, and its prominence on the social stage will continue to grow. Welcome to the 22nd Century. I hope you'll be ready.
You're Certain to Be a Millionaire (of sorts)
You're earning — and you'll continue to earn — a huge income. Take a 35-yearold making $6,000 a month. Even without salary increases, that's more than $2 million in career earnings! While that might sound like good news, it actually works against us. When making a lot of money, people often develop an attitude that says, "Gee, with this good income, life will take care of itself. It did for my parents. It did for my grandparents. It certainly will for me."
The issue, however, is not how much money you earn, but how much you keep. Look at the money your parents and grandparents earned over their careers. How much do they have left? You easily could have little left from a lifetime of work, because you don't get to keep all the money you earn. You have expenses — lots of expenses. Can you name your biggest expense?
Reason #4: To Pay for the Costs of Raising Children
According to the U.S. Department of Agriculture, a baby born in 2008 will cost high-income families $483,750. As shown in Figure 1-4...
...even lower-income families will spend $210,340, while those in between will rack up expenses of $291,570. That's per child — and only for the first 17 years! To explore the financial issues of raising young children, see Chapter 52.
Reason #5: To Pay for College
Guess what happens when the kids turn 18? They go to college!
It's estimated that for a baby born in 2010, the cost of college in 2028 will exceed $250,000 for an in-state school and over $500,000 for private schools, according to the College Board. To learn the proper way to approach the cost of college, turn to Chapter 51.
Reason #6: To Pay for a Child's Wedding
Get ready for another major expense: The wedding! According to the wedding website TheKnot.com, the average cost is $28,385 (excluding the honeymoon). Although parents of the bride traditionally paid this expense, increasing numbers of brides and grooms — and parents of grooms — are paying for weddings.
Reason #7: To Buy a Car
The average price of a new car is $28,082, according to the National Automobile Dealers Association. Thus, that purchase is one of your biggest and most confusing financial decisions — and one you'll make many times throughout your life. Should you pay cash, accept dealer financing, or use home equity? Is leasing right for you? To learn the answer, go to Chapter 50.
Reason#8: To Buy a Home
Americans devote the largest portion of their incomes to housing. Consequently, how you handle the purchase of your home will have far-reaching implications on virtually every facet of your financial life, including your ability to save, pay for college, and plan for your retirement. For this reason, I devote five chapters (56–60) exclusively to this subject, and it's referenced in many other chapters as well, including those dealing with debt elimination (Chapter 49), paying for college (Chapter 51), and the costs of raising children (Chapter 52).
Reason #9: To Be Able to Retire When — and in the Style — You Want
Consider food. Assuming you and your spouse retire at 65 and live to your normal life expectancy of 83, you're going to eat 39,420 meals in retirement! (That's three meals a day, 365 days a year over 18 years for two people.) If each of those meals costs five dollars, you'll spend $197,100 on food. Where will that money come from?
Most people are ignorant of this message. Of today's retirees 65 and older, 30% have incomes below $15,000 a year, according to the Social Security Administration. I'm not saying these people never earned more than $15,000 a year while they were working. Rather, their income dropped below $15,000 when they retired.
Only 20% of retirees earn more than $50,000 a year. Yet the masses didn't plan to fail. They simply failed to plan, because under the old rules, planning wasn't necessary. It used to be that a worker and his family could be comfortable if he retired at 62 on a pension and Social Security. That doesn't happen anymore.
Today, you don't retire as young as 62 — unless you've been downsized out of work or you are a public employee. And you're going to live much longer than your parents and grandparents did, aren't you? Therefore, your money must last much longer. And that is the dilemma: If you fail to plan, you face the possibility of a retirement filled with poverty, welfare, and charity. Many justify their failure to save by saying they plan to work into their 70s, but few people actually do that. An Employee Benefit Research Institute survey showed that 21% of workers plan on retiring at age 70 or later, yet only 5% actually do so. Health problems forced 40% to retire early; another 18% stopped working to care for a family member. That suggests people have unrealistic expectations for retirement and don't realize how they are going to achieve their goals. One thing is sure: Retirement security doesn't come automatically. It's going to require effort and attention. Part X will help.
Reason #10: To Pay for the Costs of Long-Term Care
Prior generations did not have to deal with the costs of long-term care, but we must: Of those who reach age 65, 40% will spend time in a nursing home and 70% will require long-term care at some point, according to the U.S. Department of Health and Human Services' National Clearinghouse for Long-Term Care Information.
The average annual cost of a nursing home stay now exceeds $74,000, according to the Genworth 2009 Cost of Care survey; neither your health insurance nor Medicare will pay for it. The result: A growing number of senior citizens today are supported by others because they don't have the money to care for themselves. For more on this, see Chapter 73.
Reason #11: To Care for Aging Relatives
It's not just your own care you can expect to pay for. Families are responsible for 80% of elder care in the U.S., according to AARP, and much of that help is financial. Nearly 30% of adult children contribute financially to their parents' care, chipping in for everything from uncovered medical costs to groceries, according to the Pew Research Center. Many face this burden while raising children, creating a "sandwich generation" estimated to include 34 million people. For more, see Chapter 54.
Reason #12: To Pass Wealth to the Next Generation
This is more difficult than ever before, because living longer means it is increasingly likely that you will spend your money before you have the chance to bequeath it. Economists call this transference of wealth. Historically, money was passed from father to son. It started with our immigrant ancestors, who built homes and had children. When the children married, they moved into the house with Mom and Dad. Then the kids had kids, making it three generations in one house. As the family grew larger, each generation built new rooms, increasing the size — and value — of the family's wealth. When the first generation died, the second generation inherited the house, later passing it to the next generation, with each growing more affluent than the previous one.
That doesn't happen today. We don't have three generations living in one house as often as we once did. Today, when our grandparents die, we're more likely to sell their house because we have our own home and don't need theirs.
Furthermore, we find that our grandparents live so much longer than before — longer than they expected — that they often run out of assets and have nothing to leave to their children. Therefore, instead of passing wealth down to the children, the kids send money up to the parents. Thus, in many cases, the transfer of wealth is going in reverse, and economists worry that most Americans are not prepared for this reality. Learn how to avoid that problem by reading Part VII.
It is for all these reasons — to protect against risk; to eliminate debt; you're going to live a long time; to handle such major expenses as children, college costs and weddings; to buy cars and homes; to afford a comfortable retirement; to protect against long-term care costs; to care for aging relatives; and to pass wealth to your heirs — you need to create a financial plan.