And then ... life happens
by Don Kuehn
No region of the country has escaped the effects of the recession; the toll on families from coast to coast has been hard. I hope your family weathered the storm and the road ahead looks bright. Over the past two years, you probably have taken a close look at your finances, savings and investments; trimmed spending; and balanced “wants” and “needs.”
The list of financial goals that can be tinkered with is pretty long, but you have to start with the top three: First, contribute as much as possible to your retirement plan, whether that’s a 403(b) plan, a spouse’s 401(k), or your traditional or Roth IRA. If you have an employer-contribution plan, you must put in enough of your own money to get the full benefit of the employer’s matching effort. Depending on the plan, that guarantees you a 50 to 100 percent return on your money from day one.
Second on the non-negotiable list is paying down credit card balances. Right after the holidays might be a tough time to tackle this one, but you’ll never dig yourself out of the hole if you don’t give it your best shot. Pay off the card with the highest interest rate first, and then apply that payment to the next highest rate card and so on, until you see yourself clear.
Third: It’s absolutely necessary to build an emergency fund equal to at least six months of living expenses. The reason for this should be obvious to anyone who has, or knows someone who has, been unemployed during this period of layoffs and cutbacks. Financial experts used to recommend two to three months of expenses as the benchmark for an emergency stash, but today’s low-growth economy dictates more. It can take a year or more to find work in today’s job market, so be prepared.
After you’ve tackled the big three, prioritize the other demands on your income. This might mean saving for a major vacation, buying a new car, retiring early or helping a kid through college. Whatever the goal, it’s just a wish unless you develop a plan and write it down. You’ve got to be committed.
So, everything is falling into place, your finances are finally in order, and then … life happens. The car breaks down, your college graduate gets laid off and wants to come back home, your parents’ expenses are outstripping their Social Security income. How do you assess if, and to what extent, you can help?
Before you jettison your retirement contributions or cancel the trip to Europe, think about the consequences of your decision. Of course there are some things that simply demand your financial attention. I can’t imagine walking away from a parent who needs financial help, or turning your back on a kid who needs a bridge between jobs. But what are the consequences to your savings and retirement plans? How do you compensate for the diversion of savings? Can you measure the real cost of your kindness?
If you’re 50 years old and your parents need $1,000 a month to pay for a part-time health aide and all of their prescription drugs, there is a long-term cost to your generosity. Assuming a 6 percent return on your investments, after five years, your largess means you will come up $126,000 short of your age-65 retirement goals. Based on a commonly recommended 4 percent withdrawal rate from your investments after retirement, that means you’ll have $420 a month less for the rest of your life
Meeting this new demand on your income may mean you move the retirement goalposts back a few years. That way you can delay drawing Social Security (resulting in a higher payout when you do start collecting); you’ll earn a few years more in salary to help make up for the lost savings; and you’ll have the added years of contributions to your retirement plan, resulting in a higher percentage payout when you do retire.
Or, you could cut back on your standard of living, cut out some of the nice things you have developed a taste for. Sell the boat, put your wine hobby on hold and – this one hurts – give up the golf or health club membership.
According to Money magazine, over the past five years nearly 60 percent of the oldest baby boomers have given money to their children or grandchildren. Nearly one in three is providing help to both an adult child and to an aging parent. There’s a whole lot of goal-juggling going on out there. But remember, it’s your money. When life happens, you’ve got to be ready to make it work best for you.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to email@example.com.