Financial Planning during Your Lifetime Program Recap

Thank you to Gerard Raho from Edward Jones Financial for his informative overview on how financial planning can change over the course of our lives.  Our financial goals will change as we age and we should be prepared to adjust our financial plans to meet those goals.  Having a clear understanding of our goals and where we are financially can make a significant impact on our decisions and our mental health.  So let’s take a look and see where you may fall within the financial planning landscape.

The Big 3

There are 3 questions that we need to consider when determining what we should do with our money, regardless of where we are in our life:

1. What is the time frame for this money? – How long will the money sit before you spend it?  Is it for retirement in 20, 30, 40+ years or are you planning to buy a house in 2 or 3 years?
2. What is the use of this money? – Are you looking to be able to spend it as needed; is there a big expenditure in the near future; are you focused on a comfortable nest egg for retirement?
3. What is my risk tolerance? – Am I willing to risk losing a portion of the money in the short/medium term to maximize my return in the long run?  Am I looking to safe-guard the money without the interest in significant growth?

Some Statistics

What financial program wouldn’t be complete without some important statistics.  When determining what to do with our money, we need to consider our options and how those options relate to the short and long term.  Some important facts about the stock market:

• Stock market returns an average of 7-10% per year; the bond market returns an average of 3.5-4.5% per year
• There has been no 20 year period in the history of the stock market that it has lost money
• You have a 92-93% chance to make money in any 10 year period of the stock market; you have a 83-84% chance to make money in any 5 year period of the stock market

There is also an important consideration when deciding between taxable and tax-deferred accounts:

• If you invest $10,000 with an average rate of return of 7%, over 30 years, you will yield $76,000 in a tax-deferred account versus $46,000 in a taxable account

The Younger Years

While we are in our 20s and 30s, our financial needs are going to be quite different than those as we near retirement.  Larger expenses, such as buying a car, paying off student loan debt, or buying a house can be the main focus of our finances; perhaps we started a family and are looking at the educational future of our child(ren).  This will require a different financial strategy to ensure that we have the necessary funds easily accessible, without tax implications, to ensure we can meet those financial needs.  However, this is also a great time to start planning for long-term investments; we can be more aggressive in our investing or work to max-out retirement contributions with extra income.  Again, your answers to the 3 questions above will make it much easier to determine what to do with our money.

The Middling Years

For many of us in our 40s and 50s, our financial needs are many and varied; college funding for children, career changes, second homes, luxury items (boats, fancy cars), and retirement.  Hopefully by this point we have been able to tackle the debt from our younger years and can use that money for a variety of purposes.  With potentially more disposable income, we may want to have that money easily accessible for purchases by storing it in CDs, government money market accounts, or treasury bills.  We also may want to focus on our retirement more, making sure we maximize contributions to retirement accounts or invest more heavily into the stock market.  Regardless of what our situation looks like, it is critically important during this stage to work with a financial advisor to help prioritize our financial goals and make sure our money is working toward those goals.

The Golden Years

Retirement is a much different beast than it was 20, 30, or 40 years ago.  We are living longer, which also means that our money needs to last longer; a conservative approach to our money might not be the best option.  It is very important to make sure we diversify our retirement and investments to help mitigate the effects of economic downturns.  It can be very helpful to have a retirement analysis done by a financial advisor to help in these matters.

One approach that might be useful is to plan to have 1-3 years of expenditures in liquid assets and have the rest invested to make money.  On average, there is a 2 year period between a low in the market and the next record high so after those liquid assets are spent, the profits from your investments can be used to replenish your expenditure funds, while leaving a majority of your money still working for you.

Contact Information

If you would like more information about financial planning or have questions related to your personal situation, you can contact Gerard Raho at Gerard.Raho@edwardjones.com or speak with your personal financial advisor.