Retirement planning—unusual budget items to consider

We can worry and plan for so many possibilities, but the ones that get us are often the ones we never see coming. I’d like to submit a few items for your retirement planning consideration that are not part of traditional budgets.

We can all come up with guesstimates for food, housing, property taxes, utilities, and insurance. Car purchases can be scheduled periodically (although please make a plan to stop driving at the point where your kids tell you that you should). But while walking my elderly dog yesterday and looking at my weed filled yard, I realized there are two areas I’ve never really incorporated into my own retirement plans.

The first is routine household care. If you plan to stay in your own home as you age, you will almost certainly need more of this than when you’re younger and active. Even if you’re a do-it-yourself type, you probably won’t be forever. I’d happily quit wrestling with the snow blower and the lawnmower THIS MINUTE, but right now, hey, what are kids for? But a recent stint with a fractured foot and a child away at camp have given me many thoughts about how much lawn and snow removal assistance I might need at 75 or 90, and how house cleaning services might be essential.

I’m a pretty avid gardener, but I would have to face changing my “design” and get-to projects if I had a landscaping service—no one would fool with my yard the way I do. And those of us who have a cleaning person every other week, tidying up in the interim, would probably want to step up that schedule. Some people think that cutting back on these services might be a way to cut costs once they are no longer working and have “plenty of time”, but in fact, the reverse is true. You will probably need more services, not less. Based on the fractured foot incident, and the resulting immobility, I have a good window on how a garden can transform from nice and fairly under control to the front yard of Sleeping Beauty’s castle in less than six weeks. You don’t want the EMTs to have to hack their way in to get you.

But back to the aging dog. Vet care, while so worth it, can be astoundingly expensive. The dog and our beloved cat with cancer have rung up sums that, this year, are approaching 5 figures, and we’re only in July. And I’m here to say that this isn’t the first time it’s happened over the years. I could never willingly put down an animal that had a chance at a decent quality of life, so for me it’s essential to have a pretty large pet care budget. Then there are all the services for pet care that can come to your house if you’re not up to hauling the dog to the vet, but they’re going to cost you, too.

One of the most heart wrenching aspects of moving to assisted living or nursing care is the necessity of giving up pets, so before you acquire an animal at your retirement age, think about 15 years in the future (an animal’s life span, give or take a few years). That’s caused me to realize I need to choose a smaller breed dog in the future, I want my long-term care insurance to cover home care, and my daughter will need to bond with and be capable of caring for any animals that come to live with me.

Staying in your own home, surrounded by beloved pets, is a delightful prospect, but like nearly every other goal and dream, there are aspects of financial planning that need to be considered. Excuse me, but the cat is demanding petting…

Financial advisors: fee-only or fee-based?

What’s the difference? About as much as pro-life vs. pro-choice. Yes, I have to think twice before I have those two straight, too. But on the fee-whatever, it makes a big difference in the kind of advice you’re likely to get.

If you’re old enough to remember the old comedy routine whose tag-line was, “That’s what they’d like you to believe,” you’ll understand why suddenly you see all the brokerage houses touting fee-based. It sounds more consumer friendly, like your broker
is really going to care about you, and is really a financial advisor, not a big, hairy, commission-hungry salesperson. Please bear in mind that, as of now, a stockbroker (or whatever else they call themselves now) is only obligated to recommend products or investments to you that are appropriate. Funny how appropriate also seems to mean the ones with the best commissions in any given genre, or the ones designed and marketed by their firm. The brokerage industry has fought tooth and nail to avoid being held to a fiduciary duty, which means an obligation to put the client’s interests first—to
recommend investments in the best interest of the client.

Fee-based is often a way to make the client believe they are paying less commissions for the trades they make. It’s also been a way for brokerages to sell clients a ton of different investments while basically ignoring any service. And you can be pretty certain that everything recommended in the account is going to be a product of the brokerage firm. Just compare the mutual funds management fees to one from, say, Vanguard. For a more extensive discussion, here’s a good article from Investopedia.

Guess what I’m going to recommend? Fee-only, of course. That’s what Haven is, and that’s what I think is ethical. With fee-only, you know exactly what you’re paying for. Currently, Haven charges only by the hour for financial planning advice. Fee-only set-ups don’t accept commissions, or referral fees, or lavish junkets (I wish). My recommendations are only based on helping you consider your needs and coming up with suggestions that are in your best interests.

At the moment, Haven does not manage money or your investments. However, some fee-only financial advisors do, and we may add this service in the future. Generally, this works by charging a percentage of your assets—if they go up, the amount increases (not the percentage) or down, and down goes the amount. Of course, a consumer needs to be careful of how high a percentage a fee-only planner is charging, and generally these arrangements are only cost effectivem(for both advisor and client) if the “Assets Under Management” exceed $500,000. Think about it—if the advisor is charging you .05%, you’re paying $2,500 per year. For accounts that “small”, many advisors will charge 1%. Ironic that the more money you have, the lower percentage you’ll be charged.

$2,500 would buy a lot of hours of time with an hourly planner. For under a million, you probably don’t need that much time if your investments are in well-thought out baskets. Maybe the first year, but probably not every year. However, if you’re way too busy, or nervous, and you expect to have ongoing needs for re-evaluation or advice, placing assets with an advisor who uses a custodian can be appealing. Fee-only investment advisors like “AUM” because, frankly, we get frustrated when we make great recommendations and the client never implements them. If you cringe at re-balancing, the advisor won’t be as likely to fall in love with your investments as you may be.

One other reason to use fee-only advice: a comprehensive look at everything that makes up your financial security. People will often say their advisor has done well for them if their account “goes up”, which may be due far more to the vagaries of the market than any expertise on a broker’s part. But a fee-only financial planner can take a comprehensive look at your planning for retirement, estate, college & family goals, insurance, tax, and spending management, without attempting to sell you products on any of them. For example, when have you heard a broker recommend a Coverdell? Why not? Too small potatoes. 529s make a lot more money for them.

So, how to keep them straight? My advice—ONLY fee ONLY.


College Financial Planning—what’s the right age to start?

Right after you plop on the little hat and wrap him or her in the blanket like a burrito! Right. I’m sure there are people who begin planning at birth. Those people are called grandparents. I even heard of one single person who started a 529 plan for her future children, which were still just the proverbial gleam in her eye (not such a bad idea as the 529 fund could be used for her own further education).

Bottom line, earlier is better but it’s never too late. As we all know, the longer that funds are invested, the more time they have to grow. The longer the time horizon, the more potential there is to invest in stocks and other equities, which historically have a better return (but only over long periods). A few thousand dollars invested during a child’s early years can grow to a pretty impressive sum by college. For example, only $2,000 invested once and held for 18 years, 8% return, could grow to nearly $8,000 by the time the child goes to college. Now, $8,000 isn’t going to pay tuition at Stanford, but my guess is you wouldn’t turn it down, either. Same interest, same payment, but do it every year for 18 years and you’d potentially have nearly $75,000. At today’s prices, that’s a pretty nice sum to have socked away.

Really, if you think your child might be headed to an elite private school (and who doesn’t look at their infant and think he or she is a genius?), you’ll probably need more than $2,000 per year. But, some people get so intimidated by the vast price tags currently hanging off of diplomas that they never start at all. Saving something, even a little, but starting early and doing it consistently is almost always the best policy, whether for college, retirement, or any future goal. One caveat: pay attention to fees. There are plenty of “college planners” who work on commission and will sell you all kinds of wonder-investments for a heavy commission. It’ll be wrapped into the investment so you’ll never know what hit you. Even in 529 plans, some plans charge WAAYYYY more fees than others, and this can really eat your returns.

Okay, you haven’t done it and now your kid is in high school. It’s true you don’t have all that much time to save, but it’s still worth a run. You’re probably making more now than you were when Junior was an infant, and you have a better idea of whether you might qualify for financial aid. Now’s the time to take a look at how your investments and assets are distributed, and whether there’s the potential to shift some of them to qualify you for aid (if eligible or borderline) or explore tax strategies to produce a “tax scholarship” if it’s clear you won’t be eligible. Also, Roth and traditional IRAs (for you or the child) might be considered as another potential source of investing for college. Don’t forget Roths need to be invested for 5 years before tax free withdrawals on the gains, and might be reserved for later years of college or grad school.

Try not to wait until junior year—that’s the “look-back” year and you’re going to have to scramble if you want to use asset-moving or tax strategies. Whatever your picture is when you file the FAFSA (the day of) is what will be assessed for financial aid. It’s not too late for some strategies, but you’re going to need to get a move on.

If you’re the ultimate procrastinator and have waited until AFTER the financial aid awards were announced ‘round about May, well, there’s always next year. Next year, with a better plan. Maybe it’s time to call your friendly financial planner? I look forward to working with you…