Perhaps a friend, your parents, or perhaps you, have personally been devastated by the financial crisis and it has given you renewed commitment to plan for and create your own financial future instead of being carried away by increasing debt and living “the good life” without a firm foundation. If so, you are to be commended. But the road to long-term financial freedom requires more than just mental commitment. It requires a commitment of time.
Many people regard personal financial planning with the same dread as they would a visit to the dentist or making out a will or trust with their lawyer to take effect when they die. Advance planning just doesn’t seem to be in the DNA of most people. Usually several accidents or even a death have to occur before a new stoplight is placed at an intersection where it was clearly needed. We usually pay a heavy price for these attitudes. Isn’t it obvious that we should plan for any disaster before it occurs? Yet it is seldom done. This is your chance to prepare for a financial disaster…whether it has already occurred or is just looming ahead into your long-term future.
If you are not prepared to commit a good many hours of what might seem like drudgery, you are not yet ready. For that reason, we have included a “Quick Start” module that can be used as a faster one-year starter version. It will not provide you with a plan that projects into the future, but only a current look at your financial situation. If your patience level is low, you may wish to start with this module. When you are familiar with it, you can then “graduate” to the development of your lifetime plan. For those who are fully committed and want to be able to look into the future now, the full-blown “Projections” module is recommended.
There is an old saying, the author of which is unknown to me, that goes like this: “If you don’t know where you’re going, any road will take you there.” This saying is worth its weight in gold for just about anything you try to do in life. Your personal lifetime financial plan is one of them. We have recently undergone the most destructive financial crisis in this country since the Great Depression. It has literally destroyed millions of lives financially and will alter the financial decision making of individuals and families for decades to come. Borrowing our way to prosperity was a prescription for disaster that fulfilled the prophecy no one saw coming. Those days are over. In this “new normal” as it is being called, will you take charge and chart your own course in a purposeful way and find your personal road to financial success, or follow the notorious path suggested by Yogi Berra: ”When you come to a fork in the road, take it!”? Your answer will likely forever determine whether in this harsh new environment you are able to achieve financial security, wealth, riches…or whatever words you would use to describe the comfort that comes from reaching your financial goals.
Taking the right road seems to be more important, and more difficult, than ever before. This was true even before the financial crisis, and it is even truer now. It goes well beyond the excessive borrowing that brought on the financial firestorm. For decades, financial security at retirement could be compared to a three-legged stool… the legs representing Social Security, a pension and personal investments. Is that stool still standing today?
We continue to hear about the looming insolvency of the Social Security system. In 1940 there were 42 workers to support benefit payments for each retiree. By 1950 it had declined to 16. Today the number is 3.3, and by 2030 projections indicate that there will only be 2.2 workers for every recipient of Social Security. “The entire country is getting older. In thirty years we are going to have 100% more old people and only 18% more young people to pay their benefits,” says Lawrence J. Kotlikoff, co-author of The Coming Generational Storm: What You Need to Know About America’s Economic Future (Interview with Lawrence J. Kotlikoff, CBS TV “Sunday Morning”).
In addition to the shear number of people in the baby boom generation, also contributing to the problem is the fact that in 1940 the life expectancy of men was 61.4 years and 65.7 years for women. Today the life expectancy for men is 74.2 years and 79.5 years for women. And, even though we hear the term “Social Security trust fund” from politicians, in reality no such fund exists beyond intergovernmental transfers. The ability of our government to pay for benefits in the future is dependent solely on future revenues from taxes we pay to the government. As Kotlikoff puts it, “A lot of people are going to show up in old age thinking they are going to live pretty well on their Social Security benefits and their Medicare benefits and their Medicaid benefits. But when they see those benefits slashed they are going to go from comfortable to uncomfortable…from out of poverty to potentially in poverty.”
Even though the taxes levied against our wages to fund Social Security have increased from 1% of earnings up to $3,000 in 1940 to 6.2% of earnings up to $106,800 today (which is matched by our employers), according to Kotlikoff it would take $50 trillion in current dollars to fund our Social Security obligations in the future based on benefits at current levels. Even Alan Greenspan, former Chairman of the Federal Reserve Board, has seen fit to weigh in. During testimony to Congress, he stated, “Our problem essentially is we have been making commitments (to Social Security) without focusing on our capability of meeting them.”
We have also seen pensions, the second leg of the stool, start to wither away. Increasingly, large American companies have converted existing pension plans to so-called “cash balance” plans because they require smaller company contributions. They also favor younger workers, to the detriment of those who are about to retire. Other companies are terminating their defined benefit pension plans and fewer companies are starting new ones, choosing instead to establish retirement plans such as the 401(K) that does not require contributions by the employer (some plans are even structured not to include employer contributions) and will not pay a specific benefit to retirees, as does a defined benefit pension plan. Today only about 20% of private sector employees are covered by traditional pension plans.
The third leg seems to be in trouble too. At a time when it is more important than ever for individuals to save and invest for themselves, studies indicate that Americans are saving less and less for their own financial security and retirement. A survey by the Employee Benefit Research Institute (EBRI) revealed that the percentage of respondents saying they have saved for retirement in any amount decreased from 75% to 71%. Of the respondents, 54% said they had not even tried to calculate how much money they would need for retirement. Add to that the severe declines in the stock market in recent years (which, of course, also affected the solvency of existing pension plans) and we find that even many of the former “haves” have become “have nots.” A national survey commissioned by the Del Webb Corporation indicated that 60% of “baby boomers” polled believe they will not have enough money to retire early. When asked how much money boomers thought they needed to retire, half claimed they did not know.
Added to this are the downbeat predictions of financial experts such as Bill Gross and Mohamed El-Erian of highly respected PIMCO, Warren Buffett (arguably the most successful stock market investor for many decades) and now deceased John Templeton (a pioneer in the mutual fund industry and the founder of the Templeton Funds). These experts, among many others, have been predicting that we may see more modest investment returns in the stock market for perhaps decades to come. Further impacting our investment returns are the lowest interest rates since the Great Depression in the 1930s. The big issue for the boomers in the future is this: even assuming that they can step up their savings significantly for retirement, how can they generate sufficient income on investments in their retirement given the prospects for a slow-growth stock market and the low interest rate environment that may pervade for many years to come?
All of these major issues affecting our financial lives are now converging on our ability to retire early, or on time, or at all. The long-term prospect of low returns from both stock and fixed-income investments demands of us more than ever that we devote significant energy to planning our earnings, expenses, asset accumulation, debt creation and elimination and investment decisions so we know what road we are taking, so we have a personal roadmap leading us to success, and so we can make adjustments along the way by taking appropriate forks in the road rather than just any fork in the road that comes along.
The most important feature of this e-Book is the Excel® files we will send to you when you request the “Finding Financial Freedom Files” by e-mailing us at firstname.lastname@example.org. If you do not have Microsoft Excel® on your computer, you can download the Calc program on the free OpenOffice software by going to www.openoffice.org. Our files work equally well on Excel® or on Calc. One of the files we will send you is a financial file with templates that you can use to prepare your own personal interactive roadmap to financial security. They will point out the paths that will get you there as well as the obstacles that are holding you back.
This is not something you should work on feverishly and then put on the shelf. It is a workbook both for today and for the future that you can work with, modify and learn from for the rest of your financial life. By using the Excel® worksheets within the workbook and the explanations and examples in this e-Book, you will always know where you are going financially, where it will lead you, and how you will fare when you get there. Our financial lives are constantly changing, and so will the new and updated data you input into the worksheets and the information you will obtain from them.
It is essential that Americans be educated regarding the need for proper ongoing financial planning. Many rely on a financial planner for a one-time or infrequent review. It is my experience that only a hands-on commitment by the individual whose financial security is at risk can assure that the ongoing development of the plan is successfully continued as old information becomes outdated and new information comes into play. A financial plan should always be considered a “work in progress” and you are the only person who truly cares enough about your finances to make sure it is done right and kept up to date.
Planning to achieve financial security is as much a journey as it is a destination. Nothing less than your own financial future is at stake, as Ben Stein, financial author, former White House speechwriter, Wall Street Journal columnist, investor and actor, so eloquently stated:
(Here is) an incredibly important aspect of a catastrophic problem. We have seventy-seven million people approaching retirement age in the baby boom generation. Their average savings per family is less than $100,000. This is a trivial sum in today's world. Social Security will barely pay for more than one-third of their pre-retirement income. Pension plans are dicey at best and won't provide for the rest of it. People have to take responsibility for their own financial lives. They are not doing it. Despite every kind of tax advantages being thrown at them, they are not doing it. They've got to make a plan, write it down, stick to it. They are just not doing it. People are not taking responsibility for their own lives and it is a very, very serious problem.
NBC's Today financial editor, Jean Chatzky, and author of You Don't Have to be Rich: Comfort, Happiness, and Financial Security on Your Own Terms, conducted considerable research with the Roper Organization for her new book. She puts it this way:
The research that we did for the book...and we did a large study with the folks at Roper...showed that people who have control over their money are much happier than people who don't, at all levels of income. People who had managed to come up with different ways to get organized with their money, to handle their bill paying, to save something, no matter if they make $50,000 a year, $100,000 a year, or significantly more than that, are signifcantly happier. Living within one's means is something that we've completely forgotten how to do. Two-thirds of people aren't saving anything. What that tells me is that these peole aren't living on what they make. They are living on borrowed money, and some would probably say borrowed time. It's time to come up with a plan to live within your means, in comfortable and happy fashion.
The American Dream has evolved into a financial battle for survival. This battle for "the good life," which has always included a home, vacations, health care coverage, education for our children, and a comfortable retirement, has become more and more elusive.
Personal financial planning is a process, not a series of financial products. It is an organized, well-planned system of using money and financial resources to achieve financial goals. Whether you are a retiring baby boomer or someone in your twenties who has recently entered the workforce, this book and its accompanying Excel® software can serve as a planning system and guide for the rest of your life. It will point you in the direction of financial success and increased happiness, however you define it, if you are truly committed to taking that path.