By John A. LeMieux, CFP® CIMA®
The elderly population of America is changing as the World War II generation gradually gives way to their aging children. As this transition occurs the issue of financial security, like every other issue the baby boomers have affected, is becoming a larger part of the national discussion because this biggest generation is moving from middle age to elderly.The financial security the baby boomer parents expected, and to a large degree experienced, is very different from the uncertain future facing their children. Pensions and life time health insurance have given way to 401(k)’s and Medicare with co-pays and donut holes. The war time generation had a reasonable expectation that hard work at a steady job would be rewarded with a paid off house, money in the bank and a retirement that while not extravagant would be at least comfortable. Many families that raised children in the late 40’s, 50’s and 60’s had the ability to survive with one parent working and a fulltime parent at home with the children. They had a discipline, born from watching their parents cope with the great depression and their own post-war struggle for a piece of the American dream; to live within their means, pay off the mortgage on their modest home early, save to send their kids to college and set aside money for own retirement.On the other hand, the baby boomers have come of age in a world of compounding technological advances, a rapidly evolving global economy, easy credit, rapidly rising healthcare costs and ever improving healthcare outcomes. Many have jobs with several employers instead of a long career with one employer and a gold watch at the end. These life style changes have created a pressing financial security need for many of us moving into middle age and our older friends who are at or near retirement age. Here are some steps to take to create financial security:
- Develop a budget: Record every dollar you spend in your household. Once you have your spending data determine the necessities for you and your family and see what you spend each month to cover those costs. Next, look for the items that make your life comfortable but are not critical to your well-being (cable TV, meals out, gifts for friends, etc.). Then, look at everything else. Design your budget so that you pay for your necessities first and save at least 10% of your income; then use remaining funds to pay for the items that make your life comfortable or any extra, fun things that you may want to do. You need to pay yourself first by saving as much as possible each month.
- Look carefully at how much debt you are carrying and how that debt is structured. There is some debt that may make sense, like a home mortgage but consumer debt and credit cards balances often have high interest rates. Reduce or eliminate your most expensive debt first, while making slightly above minimum payments on the other debt. Try to remember that in most cases the only appropriate use of debt is to finance appreciating assets (i.e. real estate) and that everything else is often best paid for by saving for it over time prior to the purchase. Interest costs can be a serious drain on the ability to save- eliminate or reduce interest costs wherever you can.
- Take full advantage of any employer sponsored retirement plan that is accessible to you, if one is not available, talk with a financial professional about opening an Individual Retirement Account (IRA). It is never too late to start saving. If your employer has a retirement plan with an employer match be sure and contribute enough to take full advantage of the match- that is just like a pay raise going directly to your retirement.
- Ask your employer if your benefits package includes disability insurance, health savings accounts or group life insurance- these important tools are often available at reduced rates through an employer.
- Educate yourself about the costs of health care. As our health delivery system has improved, we are living longer and as a result spending more money in our retirement years. Determine if you can save enough to pay for professional help in your home or in an assisted living or nursing facility. If this is not possible consider buying quality long-term care insurance. Even if you do not think you can cover the total cost of your care with insurance you may want to purchase as much insurance as you can afford. Every dollar of cost that you are able to pass to an insurance company is a dollar you can keep in your household. In addition to traditional long-term care insurance there are now many quality products on the market that will allow for some return of premium if the insurance is not utilized or pay a death benefit to survivors.
- Carefully review your investments to determine the return and risk (or volatility) you are exposed to. What would happen if you needed funds in the middle of a market downturn? Would you have the resources available to meet your needs? We suggest that families build up and keep at least six months worth of expenses in a savings account to cover the unexpected financial needs that will arise. After that reserve fund is established it may be appropriate to purchase securities that pay income in the form of interest (certificates of deposit and government, municipal or corporate bonds) as another level of reserve funds that will also provide some income. After you have your short-term reserve and interest bearing securities in place you may want to invest in a longer-term, more growth oriented portfolio to build the funds you may need for your retirement. At this point you may want to meet with a well regarded financial advisor for assistance. Ask your accountant, lawyer, boss or close friends for referrals and interview several financial advisors before making a decision to work with an advisor.
If you review your situation using these points as guidelines you will begin the process of developing financial security in your older years.